Skip to toolbar

What are the advantages and risks of Forward Operations?

Forward transactions are generally used by companies dealing with imports and exports. As a matter of fact, the logic of this business is that the purchase and sale of the exchange rates in the price and amount mentioned in an agreement is a matter of taking place at a later date.
Forward transactions enable companies with foreign exchange responsibilities similar to foreign exchange loans to stabilize the risks they take. Thus, companies are aware of the amount of money that will come out of their personal accounts on the maturities of their debts and do not experience serious problems that occur in cash money situations.

For example, if we assume that we have taken a 1 year term dollar loan and that the exchange rate at that time is 300 thousand pounds over the dollar, we will understand more clearly. When you go to a random bank and make forward loan transactions for 1 year after, your bank promises to sell you dollars for 1 year after a certain amount of fee.

For example, the bank commits to the exchange rate of 400 thousand dollars after 1 year. If you accept this rate, you sign the agreement that the bank has prepared for you. At the end of this term, even if the exchange rate is 500 thousand lira dollars, your bank is selling the dollar at the price of the amount you have agreed.

What Are The Advantages Of Forward Operations?

Forward operations are generally known in the market for protecting against foreign exchange revenue. There is no place in the market “over the counter” is a kind of operation called over the counter. Since these forward transactions are managed over exchange rate agreements, exchange rate risks are easy to control.

When the agreement is made, the contract shall be made first on wages, amounts, terms and similar issues. For this reason, even if there are tides in the kurda, neither side receives any negative effects from these tides. Thus, ambiguities will be avoided. The parties who sign the agreement are generally familiar with the terms and conditions of the agreement because they are already experienced in commercial work and there is no question of trust.

What Are The Risks Of Forward Operations?

Companies or companies that make agreements for Forward transactions perform contracts based on trust in each other. Of course, for this reason, the biggest risk seen in the contract is seen as credit risk. If any of the parties fails to fulfill their promises, a shortage of “default” occurs due to non-compliance with the agreement. It's a risk, actually. This risk has the potential to engulf the parties.
Forward transactions " over the counter” as we call over-the-counter transactions, there is no guarantee separately. Thus, there is risk in organized, off-exchange transactions and agreements, even if it is the case that the promised transaction is finished first. And there is no withdrawal from the contract.

How Does The Formation Of Forward Operations Occur?

Since Forward transactions are” over the counter " i.e. over-the-counter market transactions, it is not possible to submit the information of the participating parties. These types of transactions do not have what we call principal security situations. In this way, there is a risk of any loss that is possible for Forward transactions to occur, or the amount of money invested.
One of the main reasons for making forward transactions in companies is to completely eliminate the balance sheet problems that may occur due to exchange rate risk. However, even if the transactions are closed with damage due to the location at the end of the work done, the company which is based on reducing the exchange rate risk to the lowest profit gains damage.

Comments

comments

About the author

Leave a Reply

Your email address will not be published. Required fields are marked *