There are different types of risk involved in foreign exchange. One type of risk is risk...

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Finance

There are different types of risk involved in foreign exchange.One type of risk is risk involved in forward markets. There arevarious factors involved in the fluctuation or the rate of forwardmarket. Explain the factors involved in forward market and whyshould a treasury department hedge or keep the exposure open for acurrency (explain with an example).

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Below are the five factors of forward markets Forward margin Forward margin depends on the perception of buyer and seller of the currency It is nothing but a premium on the currency where the forward is costlier than its spot rate and a discount where the forward rate is cheaper then its spot rate Generally it is quoted for premium or discount based upon the same currency as of the spot rate Delivery option It refers to the process of choosing the value date within an agreed period In interbank market the date is limited to the extent of calendar month but it can be extended to further date by mutual consent One feature of the Indian market is that the delivery of a claim for foreign currency receivable is considered as delivery of the foreign See Answer

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