The forward foreign exchange market of money market

Forward foreign exchange market

Forward foreign exchange market, also known as "Long-term Foreign Exchange Market

", refers to the foreign exchange to RMB trading market in which both parties of the transaction settle the settlement on a certain date in the future according to the agreed foreign exchange currency, amount and exchange rate on the transaction date.

The main function of forward foreign exchange market is to avoid the risk brought by spot exchange rate fluctuation. Participants in the general forward foreign exchange market can be divided into three categories:

1. Risk averse.

2. Arbitrage. According to the interest rate gap among countries, under the assumption of perfect market, funds will flow from low interest rate countries to high interest rate countries. In this case, funds will flow internationally, which will affect exchange rate changes, and may lead to temporary derailment between spot exchange rate and forward exchange rate, and arbitrageurs can make profits through arbitrage.

3. Speculators. The motivation of such participants is that if they have a unique judgment on the future trend of the exchange rate, and are willing to take the risks brought by the exchange rate changes and pursue the profits they expect correctly, the forward foreign exchange market will flourish because of the participation of the above participants.

The significance of forward foreign exchange market

1. It can improve the ability of inquiry and quotation of enterprises. The forward exchange rate formed from this represents the judgment of banks and enterprises on the future trend of exchange rate, promotes the market exchange rate to move closer to the equilibrium exchange rate, and helps to eliminate the foreign exchange black market fundamentally.

2. To guide market expectations through forward foreign exchange market is helpful to the authenticity and effectiveness of spot exchange rate generation, to the determination of target exchange rate by the central bank, and to reduce the fluctuation of supply and demand in foreign exchange market.