11/14/2025

CHAPTER III
FOREX (OUTRIGHT) FORWARD
TRANSACTIONS
(GIAO DỊCH NGOẠI HỐI KỲ HẠN)

FOREX FORWARD TRANSACTION

Objectives:
Knowing definition of forex forward transaction.
Grasping characteristics of forex forward
transaction.
Understanding the quoting and calculating
method of forward rate.
Comprehending the uses of forex forward
transaction.
2

3.1. DEFINITION OF FOREX FORWARD TRANSACTION

Forex (Outright) Forward Transaction:

Being the forex transaction in which the
exchange rate is agreed by both parties
today and the delivery (payment) will be
made at that rate on a specified date in the
future, and this date must be 3 business
days or more from the contract date (trade
date).
3

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3.1. DEFINITION OF FOREX FORWARD TRANSACTION

Characteristics:
 Forex forward transaction is performed in the over-the-
counter forex market (OTC market).
 Being responsible for performing contractual obligations:
 Obliged to buy (sell) the correct amount of currency
stated in the contract.
 Obliged to buy (sell) at the agreed exchange rate.
 Obliged to perform the contract on the agreed date in the
future.
 The term of forex forward transaction is usually 1, 2, 3, 6, 9,
12 months. However, both parties can agree on odd terms
or long terms of more than 1 year. 4

3.2.1. FORWARD VALUE DATE

(Ngày giá trị kỳ hạn)
3.2.  Forward Value Date: is the settlement date
TECH of forward contract, or the date on which
NIQUES forward contract is performed.
IN
FVD = (T+n) + 2
FOREX

FORWARD Explaining:
TRANS FVD : value date in forward transaction
ACTION T : trade date (contract date)
T+n : maturity date in forward transaction
2 : number of days to transfer money 5

3.2.1. FORWARD VALUE DATE

(Ngày giá trị kỳ hạn)
3.2.
Receive USD
Buy USD 20-
TECH and pay VND
day forward
NIQUES

IN 4/10 24/10 26/10

FOREX
Trade Maturity Forward
FORWARD date date value date
(T) (T+n) (T+n)+2
TRANS
ACTION
 If the forward value date is on holiday or weekend,
it will be moved to the next business day (same as
the rules of spot value date). 6

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3.2.2. FORWARD RATES

3.2. Definition
TECH
 Forward rate is the rate agreed today to
NIQUES serve as the basis for delivery (payment) on
a specified date in the future.
IN
 Forward rate is different from spot rate due
FOREX
to different delivery terms (or payment
FORWARD terms).
TRANS  Forward rate is calculated on the basis of the
ACTION current spot rate, the term of forward
transaction, and the interest rates of two
involving currencies.
7

3.2.2. FORWARD RATES

 Like spot market, in forward market, market
3.2.
makers also make two-way quotation in both
TECH the interbank and the retail markets.
NIQUES
 Bid forward rate is the rate at which market
IN
maker is willing to buy forward the base
FOREX currency.
FORWARD  Ask forward rate is the rate at which market
TRANS maker is willing to sell forward the base
ACTION currency.
 The spread of forward rate must be larger
than the spread of spot rate. 8

3.2.2. FORWARD RATES

General Formula:
3.2.

F =S×
(1 + i )
(1 + i * )
TECH
NIQUES

IN
Explaining:
FOREX F : 1-year forward rate
S : spot rate
FORWARD
i : 1-year interest rate of terms currency
TRANS i* : 1-year interest rate of base currency
ACTION
Day-count convention (cơ sở tính lãi) of some currencies:
 AUD, JPY, USD, CHF, EUR… : 360 days / year
 GBP, HKD, SGD, CAD, VND… : 365 days / year 9

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Example: S(USD/EUR) = 1.2783

1. In case: iUSD 1y = 4.75% /year

iEUR 1y = 3.35% /year

Calculate F(USD/EUR)1y ?

2. In case: iUSD 3m = 4.75% /year

iEUR 3m = 3.35% /year

Calculate F(USD/EUR)3m ?
Calculate F(USD/EUR)92d ?
10

Example:
• An importer needs 1 million USD one year later to pay
for imported goods. The importer contacts Eximbank
and asks the bank to sell him 1 million USD one-year
forward.

F = S×
(1+i)
• Market information is as follows:
(1+i*)
S(VND/USD) = 22,934 – 22,952
iUSD1year = 4.50% – 5.50%/ year
iVND1year = 7.00% – 9.00%/ year
11

3.2.2. FORWARD RATES

ib : Bid 1-year interest rate of terms currency (deposit)
3.2.
ia : Ask 1-year interest rate of terms currency (lending)
TECH
NIQUES
i*b : Bid 1-year interest rate of base currency (deposit)
IN
i*a : Ask 1-year interest rate of base currency (lending)
FOREX
Sb : Bid spot exchange rate
FORWARD

TRANS Sa : Ask spot exchange rate

ACTION
Fb : Bid 1-year forward exchange rate

Fa : Ask 1-year forward exchange rate 12

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3.2.2. FORWARD RATES

* The basis for calculating Bid-Ask Forward Rate:
3.2.
 When offering forward transactions, market
TECH
NIQUES
makers create the unbalanced forex position
and cash flow position → exposed to (meet)
IN exchange rate risk and interest rate risk.
FOREX  To avoid these risks, they need to balance their
FORWARD created forex position and cash flow position by
making appropriate transactions in the money
TRANS
ACTION market and forex market.
→ These trading steps are the basis for
calculating Bid-Ask Forward Rate.
13

Forex
Performing steps Cash Flow Postion
Position
VND USD USD
Present 1/ Sign contract to buy
+ 1
USD 1 year forward(Fb)
2/ Borrow USD with 1- 1 1
+ - i a*
year term (i*a) 1 + ia* 1 + i a*
3/ Sell USD spot (Sb) 1 1 1
+ Sb - -
1 + ia* 1 + ia* 1 + ia*
4/ Lend VND with 1- 1
- Sb
year term (ib) 1 + i a*
Net cash flow 0 0 0
5/ Pay principal and
One
interest in USD - 1
year
later 6/ Perform F. contract - Fb + 1
1 1 1 + ib
+ ( Sb 1 + ia* + Sb 1 + ia* ib ) = Sb 1 + ia*
7/ Receive principal
and interest in VND

Net cash flow 0 0 0 14

3.2.2. FORWARD RATES

Bid Forward Rate Formula:
3.2.

(1 + ib )
Fb = S b ×
TECH
NIQUES

IN (1 + i a* )
FOREX
Explaining:
FORWARD
Fb : Bid 1-year Forward Rate
TRANS
ACTION Sb : Bid Spot Rate
ib : Bid 1-year Interest Rate of Terms Currency
i*a : Ask 1-year Interest Rate of Base Currency 15

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Forex
Performing steps Cash Flow Postion
Position
VND USD USD
Present 1/ Sign contract to sell
- 1
USD 1 year forward(Fa)
2/ / Borrow VND with 1- 1
year term (ia)
+ Sa
1 + i b*
1 1 1
3/ Buy USD spot (Sa) - Sa + + 1 + i b*
1 + i b* 1 + i b*
1 1
4/ Lend USD with 1-
- + i b*
year term (i*b) 1 + i b* 1 + i b*
Net cash flow 0 0 0
One 5/ Receive principal
and interest in USD
+ 1
year
later 6/ Perform F. contract
+ Fa - 1
1 1 1 + ia
- ( S a 1 + ib* + S a 1 + ib* ia ) = Sa 1 + ib*
7/ Pay principal and
interest in VND

Net cash flow 0 0 0 16

3.2.2. FORWARD RATES

Ask Forward Rate Formula:
3.2.

(1 + i a )
Fa = S a ×
TECH
NIQUES

IN (1 + ib* )
FOREX
Explaining:
FORWARD
Fa : Ask 1-year Forward Rate
TRANS
ACTION Sa : Ask Spot Rate
ia : Ask 1-year Interest Rate of Terms Currency
i*b : Bid 1-year Interest Rate of Base Currency 17

3.2.2. FORWARD RATES

* Notes:
3.2.
 Forward rates in the above formulas are just
TECH breakeven forward rates.
NIQUES  To make profit, market makers need to decrease
IN
some points at breakeven bid forward rate and
increase some points at breakeven ask forward rate.
FOREX The increase or decrease is more or less depending
on competitive situation in the market.
FORWARD
 Forward rates in the above formulas are applied to
TRANS one-year term. Therefore, when calculating forward
ACTION rates with different terms, it is necessary to adjust
interest rates to corresponding terms (noting that
market information often shows interest rates for all
terms in %/year → easy to confuse). 18

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Example: An importer needs 1 million USD one year later to pay for
imported goods. The importer contacts Eximbank and asks the bank
to sell him 1 million USD with one-year forward. Market information
is as follows:
S(VND/USD) = 22,934 – 22,952
iUSD1year = 4.50% – 5.50%/ year
iVND1year = 7.00% – 9.00%/ year
1. Calculate the breakeven bid - ask 1-year forward rates
Fbr1y(VND/USD) of Eximbank ?
2. If Eximbank wants to make a profit of 5 points in both buying and
selling directions, what is the bid – ask 1-year forward rates
F1y(VND/USD) that Eximbank quotes to the customer?
3. Supposing that the above USD and VND interest rates are at the
3-month term, calculate the breakeven bid – ask 3-month
forward rates Fbr 3m(VND/USD) of Eximbank ? 19

3.2.3. FORWARD MARGIN / POINT

3.2.

TECH Definition:
NIQUES

IN
 Forward Margin / Forward Point (Điểm kỳ

FOREX
hạn):

FORWARD
Being the difference between forward rate
TRANS
ACTION
and spot rate.

20

3.2.3. FORWARD MARGIN / POINT

* Exact general formulas:
3.2.  Absolute forward margin / point

S ( i − i *)
P = F − S =
TECH
NIQUES
1 + i*
IN
 Relative forward margin / point (Unit: %/year)
FOREX
F −S 12  360 / 365 
FORWARD P% = × 100 % × x 
S N  n 
TRANS
ACTION
Explaining:
F : Forward rate
S : Spot rate
N : Term (in months) ; n : Term (in days)
21
 i & i* : Int. rates (%/year) of terms and base currencies

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3.2.3. FORWARD MARGIN / POINT

* Approximate general formulas:
3.2.  Absolute forward margin / point

TECH
NIQUES
P = S (i − i * )
IN  Relative forward margin / point (Unit: %/year)

FOREX
P % = i − i*
FORWARD
i & i* : Interest rates (%/year) of terms and base
TRANS currencies.
ACTION
→ Reflecting the interest rate differential between two
currencies: the currency with lower interest rate
appreciates forward (in forward transaction). 22

3.2.3. FORWARD MARGIN / POINT

 Forward margin is a positive number: Forward
3.2.
Premium / Forward Pickup (điểm kỳ hạn gia tăng)
TECH
NIQUES i > i*⇔ P > 0 ⇔ F > S Base currency appreciates forward

IN → Base currency has the forward premium.

FOREX
 Forward margin is a negative number : Forward
FORWARD Discount/ Forward Markdown (điểm kỳ hạn khấu trừ)
TRANS i < i* ⇔ P<0 ⇔ F < S Base currency depreciates forward
ACTION
→ Base currency has the forward discount.

23

1. i* < i  P > 0  F(x/y) > S(x/y): base currency y appreciates forward or

base currency y has the forward premium. (FM = F – S: positive).
** Meaning of forward premium: indicates the increased amount of terms
currency x per each base currency y at forward rate compared to spot rate.
E.g.: The rate of USD/AUD has the 2-month forward premium of 200 points
or FM(USD/AUD)2m = 200, what does it mean?
At the 2-month forward rate F(USD/AUD)2m, each AUD increases by 0.02
USD compared to spot rate.
2. i < i*  P < 0  F(x/y) < S(x/y) : base currency y depreciates forward or
base currency y has the forward discount. (FM= F – S: negative).
** Meaning of forward discount: indicates the decreased amount of terms
currency x per each base currency y at forward rate compared to spot rate.
E.g.: The rate of JPY/USD has the 1-month forward discount of 50 points or
FM(JPY/USD)1m = - 50, what does it mean?
At the 1-month forward rate F(JPY/USD)1m, each USD decreases by 0.5 JPY
24
compared to spot rate.

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Example 1:
1. The 1-year interest rate of USD is 5%/year. The
1-year interest rate of VND is 13%/year. Does
USD appreciate or depreciate 1-year forward?
What is the percentage of appreciating (or
depreciating) 1-year forward?
2. The 3-month interest rate of USD is 5%/year.
The 3-month interest rate of VND is 13%/year.
Does USD appreciate or depreciate 3-month
forward? What is the percentage of appreciating
(or depreciating) 3-month forward?
25

Example 2: S(USD/AUD) = 0.7752

F2m(USD/AUD) = 0.7952
1. Has AUD the 2-month forward premium or
discount? How much is the 2-month
forward margin of AUD?
2. Has USD the 2-month forward premium or
discount? How much is the 2-month
forward margin of USD?

26

3.2.3. FORWARD MARGIN / POINT

* Exact Breakeven Bid - Ask Forward Margin Formulas:
3.2.  Breakeven Bid Forward Margin (FMb br)
TECH
NIQUES
(ib − ia* )
IN FMbbr = Sb ×
FOREX
(1 + ia* )
FORWARD  Breakeven Ask Forward Margin (FMa br)
TRANS
ACTION (ia − ib* )
FMabr = Sa ×
(1 + ib* ) 27

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3.2.3. FORWARD MARGIN / POINT

* Approximate Breakeven Bid - Ask Forward Margin Formulas :

3.2.  Breakeven Bid Forward Margin (FMb br)

TECH
NIQUES FMbbr = Sb(ib − ia* )
IN  Breakeven Ask Forward Margin (FMa br)

FOREX
FMabr = Sa (ia − ib* )
FORWARD
* In fact, dealers often use approximate formulas to
TRANS
determine forward margins and forward rates due to:
ACTION
 Fast and simple calculation.
 Insignificant change in comparison with forward
28
rates calculated by exact formulas.

3.2.4. FORWARD RATE QUOTATION

3.2. * There are 3 following ways to quote the rate:

TECH (1) Quoting in full numbers of forward rates.

NIQUES

IN (2) Quoting by absolute forward margin.

FOREX
(3) Quoting by relative forward margin (%/year)
FORWARD

TRANS
* The second way (quoting in absolute forward
ACTION margin) is widely applied in practice, especially
in interbank forward transactions.
29

QUOTING IN FULL NUMBERS

(Terms currency: USD)

GBP AUD
Terms
Bid Ask Bid Ask
Rates Rates Rates Rates
Spot 1.5815 1.5830 0.9863 0.9869

1 month 1.5796 1.5813 0.9867 0.9875

2 months 1.5789 1.5808 0.9872 0.9883

3 months 1.5773 1.5795 0.9888 0.9907

30

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QUOTING BY ABSOLUTE FORWARD MARGIN

(Terms currency: USD)

GBP AUD
Terms
Bid Ask Bid Ask
Rates Rates Rates Rates
Spot 1.5815 1.5830 0.9863 0. 9869

1 month 19 – 17 4–6

2 months 26 – 22 9 – 14

3 months 42 - 35 25 - 38
31

QUOTING BY ABSOLUTE FORWARD MARGIN

3.2.
* Determining forward rates in the quotation way
TECH
NIQUES of absolute forward margin:
IN  Bid forward margin > Ask forward margin :
FOREX Forward rate = Spot rate – Forward margin
FORWARD  Bid forward margin < Ask forward margin :
TRANS Forward rate = Spot rate + Forward margin
ACTIO

32

1. Calculate F1m (USD/GBP)?

Since FMb 1m = 19 points > FMa 1m = 17 points, these
forward margins are forward discounts. Therefore:

Thus, F1m (USD/GBP) =

2. Calculate F1m (USD/AUD)?
Since FMb 1m = 4 points < FMa 1m = 6 points, these forward
margins are forward premiums. Therefore:

Thus, F1m (USD/AUD) = 33

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QUOTING BY RELATIVE FORWARD MARGIN (%/YEAR)

(Terms currency: USD)

GBP AUD
Terms
Bid Ask Bid Ask
Rates Rates Rates Rates
Spot 1.5815 1.5830 0.9863 0.9869

1 month - 1.4416% - 1.2886% + 0.4867% + 0.7296%

2 months - 0.9864% - 0.8338% + 0.5476% + 0.8512%

3 months - 1.0622% - 0.8843% + 1.0139% + 1.5402%

34

3.3. USES OF FOREX FORWARD TRANSACTION

3.3.1. Exchange rate hedging

3.3.2. Speculation

3.3.3. Covered Interest Arbitrage – CIA (Kinh

doanh chênh lệch lãi suất có bảo hiểm
rủi ro tỷ giá)

35

3.3. USES OF FOREX FORWARD TRANSACTION

3.3.1. Exchange rate hedging:

[Link]. Import payments

[Link]. Loans in foreign currency

[Link]. Export revenues

[Link]. Investments in foreign currency

36

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3.3.1. EXCHANGE RATE HEDGING

[Link]. IMPORT PAYMENTS

Example:
A Vietnamese importer must pay USD100,000 to a
US exporter after 3 months.

The current spot rate is 23,000 VND/USD

The 3-month forward rate is 23,900 VND/USD

Analyze this example?

37

3.3.1. EXCHANGE RATE HEDGING

[Link]. IMPORT PAYMENTS
→ Create/ open/ have the short forex (FX) position
→ Exchange rate risk: after 3 months, if USD
appreciates against VND, making an increase in the
rate of VND/USD, the cost (or amount) of VND to buy
USD100,000 will increase/ be more.
Xử lý :
No exchange rate hedging: after 3 months,
buying USD at the spot rate in the market at that
time (e.g. 24,000 VND/USD)
Exchange rate hedging: buying USD 3-month
forward at the forward rate of 23,900 VND/USD.
38

3.3.1. EXCHANGE RATE HEDGING

[Link]. IMPORT PAYMENTS
Comment :
 If buying USD100,000 3-month forward at the forward rate of
23,900VND/USD, the importer fixes/ locks the cost of VND23,900,000
to pay for imported goods, and does not worry about the fluctuation of
exchange rate  the act of buying forward is known as exchange rate
hedging.
 Without exchange rate hedging, the importer can suffer a big loss
(Example: The rate sharply rises at 24,500 VND/USD).
However, if the rate in next 3 months is 21,000 VND/USD, the cost of
VND will be less than buying USD forward. Therefore, should the
importer buy USD forward to hedge exchange rate risk ?
 What is the meaning of exchange rate hedging by buying forward
in this case ?
 Exchange rate hedging: Buy USD100,000 3-month forward.
39

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3.3.1. EXCHANGE RATE HEDGING

[Link]. LOANS IN FOREIGN CURRENCY
Example:
In order to meet the demand for domestic currency capital, an
Australian company borrows USD1,000,000 for 6-month term at
the interest rate of 5%/year and converts to AUD for use.
The current spot rate is 0.7635 – 0.7650 USD/AUD.
The 6-month forward rate is 0.7550 – 0.7570 USD/AUD.
→ Exchange rate risk: if USD appreciates against AUD 6 months
later, making an decrease in the rate of USD/AUD, the cost of
AUD to repay the USD loan will be more. (Example: The spot
rate in next 6 months is 0.7100 – 0.7110 USD/AUD).
 Hedging: Buy USD (principal + interest) 6–month forward.
Exchange rate hedging on loans in foreign currency is
similar to exchange rate hedging on import payments.40

At present, amount of AUD that Australian company receives when the

company converts USD to AUD:

After 6 months, amount of USD (loan+ interest) that Australian company

must repay:
Analysis of exchange rate risk: To understand clearly the exchange rate
risk that Australian company faces, only consider first the original loan
of USD 1,000,000. When the loan is due 6 months later, the spot rate in
the market is 0.7100 – 0.7110 USD/AUD and at this time, Australian
company buys USD 1,000,000 to repay the loan, the spent amount of
AUD will be:
Comparing between (1) and (2), it is found that the Australian company
has suffered losses because with USD 1,000,000, the received amount
of AUD for use is less than the spent amount of AUD to repay the loan.
41

Exchange rate risk of Australian company: USD appreciates against AUD

in next 6 months. This makes a decrease in the rate of USD/AUD because
USD is the terms currency in the rate of USD/AUD. Therefore, the spent
amount of AUD for repaying the loan and interest in USD will be more.
Exchange rate hedging: Australian company buys 6-month forward the
loan and interest of USD 1,025,000 at the bid forward rate quoted as Fb6m
=
The amount of AUD that Australian company pays when the company
hedges exchange rate risk by forward transaction:

Thus, by buying forward, 6 months later, Australian company surely

spend a fixed amount of AUD 1,357,616 to repay loan and interest →
Buying forward the loan and interest in foreign currency is the most
effective choice of the borrowing currency in international borrowing
(choose the method of spending the least amount of domestic
42
currency).

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3.3.1. EXCHANGE RATE HEDGING

[Link]. EXPORT REVENUES
Example : A Japanese exporter has an export revenue of
USD1,000,000 after 6 months.
The current spot rate is 110.00 - 110.10 JPY/USD
The 6-month forward rate is 105.00 – 105.30 JPY/USD
→ Have/ create/ open the long forex (FX) position.
→ Exchange rate risk: after 6 months, if USD depreciates
against JPY, making an decrease in the rate of JPY/USD,
the received amount of JPY will decrease/ be less when
converting the export revenue in USD to JPY (Example: the
spot rate 6 months later is 101.00 – 101.07 JPY/USD).
 Exchange rate hedging:
Sell USD1,000,000 6-month forward. 43

3.3.1. EXCHANGE RATE HEDGING

[Link]. INVESTMENTS IN FOREIGN CURRENCY
Example: A Singaporean investor converts SGD1,000,000 to
USD to invest in US Treasury Bills for 1 year at the interest rate
of 4%/year.
The current spot rate is 1.3466 – 1.3475 SGD/USD
The 1-year forward rate is 1.3240 – 1.3260 SGD/USD
→ Exchange rate risk: after 1 year, if USD depreciates against
SGD, making an decrease in the rate of SGD/USD, the
received amount of SGD will decrease/ be less when converting
the investments in USD to SGD (Example: the spot rate 1 year
later is 1.2452 – 1.2459 SGD/USD).
 Hedging: Sell USD (principal + interest) 1-year forward.
Exchange rate hedging on investments in foreign currency
is similar to exchange rate hedging on export revenues.44

If converting domestic currency to foreign currency and investing in

foreign currency, the received principal and interest in foreign currency
in the future will create long forex position and exchange rate risk
appears: foreign currency depreciates.
At present, amount of USD that the investor receives when converting
SGD to USD is:
After 1 year, amount of USD (principal + interest) the investor will
receive:
Analysis of exchange rate risk: One year later, the investor receives
principal and interest in USD. At this time, if spot rate in the market is
1.2452 – 1.2459 SGD/USD and the investor converts principal and
interest in USD to SGD again to determine profit or loss. Then, the
obtained amount of SGD is:
Clearly, the investor suffers a loss because the received amount of SGD
is smaller than the initial principal of SGD 1,000,000. 45

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Exchange rate risk: the foreign currency of USD will depreciate against
SGD one year later. Because USD is base currency in the rate of
SGD/USD, this rate will fall. Therefore, the received amount of SGD
will be less when converting the principal and interest in USD to SGD.
Exchange rate hedging: The investor sells 1-year forward the principal
and interest of USD771,800 at the quoted

Amount of SGD received by the investor when hedging exchange rate

risk by forward transaction:
Thus, by selling forward to hedge exchange rate risk, the investor
knows that 1 year later, he is sure of receiving the fixed principal and
interest of SGD regardless of the exchange rate fluctuation
→ Selling forward principal and interest in foreign currency is the
most effective choice of the investing currency in international
investment (choose the method of collecting the most amount of
46
domestic currency).

3.3. USES OF FOREX FORWARD TRANSACTION

3.3.2. SPECULATION
 If traders expect that a certain currency appreciates
in the future → speculate by buying forward that
currency.
 If traders expect that a certain currency depreciates
in the future → speculate by selling forward that
currency.
 If a market maker offers forward contracts but he
does not make appropriate transactions to balance
the opened forex position and cash flow position →
he is considered a speculator. 47

If a currency is expected to appreciate in the future:

* Speculating by forward transaction: (buy first, sell later)
- Currently, sign a contract to buy forward the currency (that is
expected to appreciate) at the agreed forward rate.
- On the value date in the future, perform the forward contract to buy
this currency at the agreed forward rate and at the same time, sell spot
this currency with spot rate rising as expected (higher than the forward
rate), so it is possible to make profit. Otherwise, it can suffer a loss.
** Speculating by spot transaction: (buy first, sell later)
- Currently, buy spot the currency (that is expected to appreciate) at the
agreed spot rate.
- In the future, when this currency appreciates as high as expected
(higher than the agreed spot rate), sell spot this currency and earn
profit. Otherwise, it can suffer a loss. 48

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If a currency is expected to depreciate in the future:

* Speculating by forward transaction: (sell first, buy later)
- Currently, sign a contract to sell forward the currency (that is
expected to depreciate) at the agreed forward rate.
- On the value date in the future, buy spot this currency with spot rate
falling as expected (lower than the forward rate) and at the same time,
perform the forward contract to sell this currency at the agreed forward
rate, so it is possible to make profit. Otherwise, it can suffer a loss.
** Speculating by spot transaction: (sell first, buy later)
- Currently, sell spot the currency (that is expected to depreciate) at the
agreed spot rate.
- In the future, when this currency depreciates as low as expected
(lower than the agreed spot rate), buy spot this currency and earn profit.
Otherwise, it can suffer a loss. 49

3.3. USES OF FOREX FORWARD TRANSACTION

3.3.2. SPECULATION

Example: At present, an investor predicts that USD

will appreciate sharply against CAD in next 3 months
(the rate of CAD/USD rise strongly). He decides to
speculate by forward transaction.

Present his way of speculating by forward transaction

in the case that:

1. He speculates on USD (capital is CAD) ?

2. He speculates on CAD (capital is USD) ?

50

3.4. COMMERCIAL BANKS’ RISKS IN FORWARD TRANSACTION

* When performing forward transactions, commercial banks

can face the following risks:
 Risk that counterparty does not fulfil contractual
obligations (Credit risk). Why is credit risk easy to
appear in forward tranactions? What are solutions to limit
this risk?
 Liquidity risk.
 Market risk: Exchange rate risk and Interest rate risk.
* These two types of risks arise because commercial banks:
- Provide forward contracts for customers and create the
unbalanced forex position and cash flow position.
- Use forward transactions for speculation.
* What are solutions to limit these two types of risks? 51

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3.5. FORWARD TRANSACTIONS IN VIETNAM

 Forex forward transactions in Vietnam are currently used

modestly with the small proportion (5 – 6%) of
commercial banks’ foreign currency trading turnover. For
commercial banks, selling forward is usually more than
buying forward. WHY?
 Why don’t forward transactions in Vietnam develop?
 Legal documents of forward transactions in Vietnam:
Circular No. 02/2021/TT-NHNN dated Mar. 31st, 2021
of SBV for instructing credit institutions licensed to
conduct forex transactions in trading in the forex market.
(effective from May 17th, 2021). 52

3.5. FORWARD TRANSACTIONS IN VIETNAM

* Method of calculating forward rate in Vietnam according to
SBV’s regulations :
 The ceiling forward rate of VND/USD is calculated as follows:
Spot rate on the date of signing forward contract.
The difference between two interest rates of VND and USD:
- Interest rate of VND is refinancing interest rate (lãi suất tái
cấp vốn) of VND (%/year) announced by SBV.
- Interest rate of USD is Fed Funds Target Rate (lãi suất mục
tiêu) of USD announced by Federal Reserve.
Term of contract is agreed by two parties (3 to 365 days from
the date of signing contract).
 The forward rate of VND/USD agreed by two parties must not
exceed the above ceiling forward rate of VND/USD.
 Terms and forward rates between VND – other foreign currencies
and foreign currencies - foreign currencies are agreed by credit
institutions and customers, not bound by SBV’s regulations. 53

Exercise 1: Bank A quotes the following rates:

Spot : 1.1541 – 1.1549 CAD/USD
6-month Forward : 68 – 52.
A US importer will have to make payment of CAD 4,500,000 in next
6 months. He wants to use forward contract with Bank A to hedge
exchange rate risk.
1. Calculate the Bid - Ask 6-month forward rate of F(CAD/USD)
quoted by Bank A.
2. What is US importer’s exchange rate risk? What will he do if he
uses forex forward transaction to hedge exchange rate risk on
import payment paid after 6 months?
3. Calculate the paid amount of USD when the importer uses
forward transaction to hedge exchange rate risk.
4. By the time the contract expires after 6 months, spot rate in the
market is 1.1436 – 1.1445 CAD/USD, explain by argument (without
calculation) whether his use of forward contract for hedging is
54
effective or not? Calculate his profit (or loss) in this case.

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Exercise 1: ANSWER
1. F6m (CAD/USD) = 1.1473 – 1.1497
2. Exchange rate risk: CAD appreciates against USD ; the rate of
(CAD/USD) decreases ; the paid amount of USD will be more.
Hedge against exchange rate risk: Buy CAD 4,500,000 6-month
forward at.1.1473 CAD/USD
3. The paid amount of USD: USD 3,922,252
4. According to the answer to question 2, an decrease in the rate
of CAD/USD makes the paid amount of USD be larger.
Meanwhile, it is clear that the spot rate after 6 months is lower
than the signed forward rate. So, the amount of USD paid at spot
rate is larger than the one at forward rate. In other words, using
forward contract is effective in this case.
Profit (actually, the saving amount of USD: số tiền USD tiết kiệm
được) = 12,690 USD. 55

Exercise 2: At present, a Hong Kong exporter has an export revenue

of USD 5,000,000 which wiil be received in next 2 months. The
exporter contacts your bank for requesting a 2-month forward rate
quotation of F(HKD/USD). The information in the forex market is
available as follows: Spot rate: 7.7632 – 7.7643 HKD/USD
2-month interest rate of HKD: 3.80% - 4.05%/year
2-month interest rate of USD: 4.50% - 4.70%/year
1. Calculate your bank’s Bid - Ask breakeven 2-month forward rate of
F(HKD/USD).
2. If your bank wants to make a profit of 8 points at the buying
direction and 12 points at the selling direction, what is the 2-month
forward rate of F(HKD/USD) quoted by your bank?
3. What is Hong Kong exporter’s exchange rate risk? What will he do if
he uses forex forward transaction at your bank to hedge exchange
rate risk on export revenue?
4. Calculate the received amount of HKD when the exporter uses
forward transaction to hedge exchange rate risk on export revenue.
5. If the exporter uses the money market to hedge exchange rate risk,
56
how will he do? (only present the performing way).

Exercise 2: ANSWER
1. F2m br (HKD/USD) = 7.7516 – 7.7585
2. F6m(HKD/USD) is quoted to customer = 7.7508 – 7.7597
3. Exchange rate risk: USD depreciates against HKD ; the
rate of (HKD/USD) decreases ; the received amount of HKD
will be less.
Hedging: Sell USD 5,000,000 2-month forward at 7.7508
HKD/USD.
4. The received amount of HKD: HKD 38,754,000
5. Using money market to hedge exchange rate risk:
- Borrowing USD with 2-month term
- Buying HKD spot
- Investing HKD with 2-month term. 57

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