Forward Exchange Market Reform

Abstract

Exchange rate fluctuations present a risk to two main types of businesses: those with future foreign currency payment obligations (e.g. importers) and those with future foreign currency, receipts (e.g. exporters). The former type of business is exposed to an appreciation of the foreign currency relative to the domestic currency, or run the risk of having to pay, in the future, more in domestic currency for the same amount of foreign currency. The latter type of business is exposed to a depreciation of the foreign currency in terms of the domestic currency or run the risk of receiving, in the future, less domestic currency for the same amount of foreign currency. Buyers and sellers of foreign currencies may therefore want to cover their risks against exchange rate fluctuations through forward exchange markets if such markets exist for the currencies involved. With the use of a forward exchange contract, they may cover the risk of an appreciation by a forward purchase and the risk of a depreciation by a forward sale of the foreign currency.