Operation of currency forward and futures market
Describe basic differences between operation of a currency forward market and a futures market.
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Forward market is an OTC market where forward contract for the sale or purchase of foreign currency is tailor-made between the client and its international bank. No money changes hands up till the maturity date of the contract when the delivery and receipt are generally made. A futures contract is an exchange-traded instrument with the standardized attributes stating the contract size and the delivery date. Futures contracts are marked-to-market daily in order to reflect the changes in settlement price. Delivery is made sometimes in the futures market. Instead a reversing trade is made to close out a short or long position.
It is, normally, not possible to fully remove both the translation exposure and transaction exposure. In some cases, eradication of one exposure will also eliminate the other. However in other cases, removal of one exposure really creates the other.
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