Outright Forward (Currency Forward)

    graph TD;
	    A[Spot Rate] -->B[Add/Subtract Forward Points]
	    B --> C[Forward Rate]

## What is the main purpose of an outright forward contract? - [x] To lock in an exchange rate for a future date - [ ] To speculate on currency movements - [ ] To exchange currencies at the current market rate - [ ] To provide regular interest payments > **Explanation:** The main purpose of an outright forward is to lock in an exchange rate for a transaction that will occur in the future, protecting against volatility. ## Which of the following is true about the delivery date of an outright forward? - [ ] It must always be the same as the spot value date - [x] It is set for a date later than the spot value date - [ ] It can never be in the past - [ ] It can only be one year from now > **Explanation:** An outright forward specifies a delivery date that is after the spot value date, making it useful for future transactions. ## How does one determine forward points? - [ ] By guessing the next currency trend - [x] Using the difference between interest rates of the two currencies - [ ] Based on the number of trades done last week - [ ] It’s a secret known only to brokers > **Explanation:** Forward points are calculated using the interest rate differential between the two currencies, not guesswork or secrets! ## In which scenario would a company most likely use an outright forward? - [ ] When planning a vacation to Europe next month - [ ] When buying stocks in a foreign company - [x] When expecting future sales in a foreign currency - [ ] When deciding what to do with their birthday money > **Explanation:** Companies often use outright forwards when they are expecting future sales or receipts in a foreign currency to hedge against currency risk. ## What happens if the currency value moves in your favor after you secure a forward contract? - [ ] You get a refund from your broker - [x] You are locked into the worse rate, but you were hedging, remember? - [ ] You can adjust the terms of your contract - [ ] You break the contract and pay a penalty > **Explanation:** Once locked into a forward contract, you cannot change the terms, so you miss out on potentially better rates. ## What is the risk associated with using an outright forward? - [ ] No risk at all - [ ] The market risk of the two currencies - [x] Opportunity cost if the rate moves favorably - [ ] The risk of misunderstanding foreign jargon > **Explanation:** The main risk of using an outright forward is the opportunity cost – you could potentially miss out on better rates. ## Can you trade outright forwards on the stock exchange? - [ ] Yes, through listed contracts - [x] No, they are OTC (Over-the-Counter) contracts - [ ] Only during special trading hours - [ ] Only if you’re part of a trading group > **Explanation:** Outright forwards are Over-the-Counter contracts, meaning they aren't traded on the stock exchange. ## Who mostly uses outright forwards? - [ ] Only tourists traveling abroad - [ ] Speculators seeking profit - [x] Importers and exporters managing currency risk - [ ] People who enjoy science fiction > **Explanation:** Importers and exporters primarily use outright forwards to manage currency risk in international transactions. ## A key feature of an outright forward is: - [x] It locks in an exchange rate for a future transaction - [ ] It guarantees a profit regardless of market movement - [ ] It incurs an interest rate penalty - [ ] It's only available on public holidays > **Explanation:** The ability to lock in an exchange rate for a future transaction is the defining feature of an outright forward.