124 CHAPTER 4. UNDERSTANDING FORWARD EXCHANGE RATES FOR CURRENCY
as in a spot contract. The rate that is used for all contracts initiated at timetand
maturing at some future momentT is called the time-tforward rate for delivery
dateT. We denote it asFt,T.
Like spot markets, forward markets are not organized exchanges, but over-the-
counter (OTC) markets, where banks act as market makers or look for counterparts
via electronic auction systems or brokers. The most active forward markets are the
markets for 30 and 90 days, and contracts for 180, 270, and 360 days are also quite
common. Bankers nowadays quote rates up to ten years forward, and occasionally
even beyond that, but the very long-term markets are quite thin. Recall, lastly,
that any multiple of thirty days means that, relative to a spot contract, one extra
calendar month has to be added to the spot delivery date, and that the delivery
date must be a working day. Thus, if day [t+ 2 plusnmonths] is not a working
day, we may move forward to the nearest working day, unless this would make us
change months: then we’d move back.
Example 4.1
A 180-day contract signed on Thursday March 2, 2006 is normally settled on Septem-
ber 6. Why? The initiation day being a Thursday, the “spot” settlement date is
Monday, March 6. Add 6 months; September 6, being a working day (Wednesday),
then is the settlement date.
Market Conventions for Quoting Forward Rates
Forward exchange rates can be quoted in two ways. The most natural and simple
quote is to give the actual rate, sometimes called theoutrightrate. This convention
is used in, for instance, TheWall Street Journal, theFrankfurter Allgemeine, and
the CanadianGlobe and Mail. TheGlobe and Mailis one of the few newspapers
also quoting long-term rates, as Table 4.1 shows.
In Table 4.1, thecad/usdforward rate exceeds the spot rate for all maturities.
Traders would say that theusdtradesat a premium. Obviously, if thecad/usd
rate is at a premium, theusd/cadforward rates must be below theusd/cadspot
rate; that is, thecadmust tradeat a discount.
The second way of expressing a forward rate is to quote the difference between
the outright forward rate and the spot rate—that is, quote the premium or discount.
A forward rate quoted this way is called a swap rate.^1 Antwerp’sDe Tijd, or the
LondonFinancial Times, for example, used to follow this convention. Since both
newspapers actually showed bid and ask quotes, we will postpone actual excerpts
from these newspapers until the next chapter where spreads are taken into consid-
(^1) Confusingly, the terms swap contract and swap rate can have other meanings, as we shall
explain in Chapter 7.