Trading and Relative Value · Forwards Trading Guide

A forward can express a directional market view, but the trade begins at the forward rate rather than the spot rate on a news screen.

Define the actual trade

A long EUR/USD forward buys euros and sells dollars at a future date. It is a speculative position if there is no offsetting commercial or investment exposure. State the notional, maturity, entry rate and intended exit process. Access can require a dealer relationship, credit assessment and suitable legal documentation. A retail platform using similar terminology may offer a different product.

Use the correct breakeven

Assume a trader buys EUR 100,000 forward at 1.1100 while spot is 1.1000. If the matching maturity reference is 1.1200, a simple cash settlement gains $1,000 before costs. The gain is not $2,000 measured from the old spot. If the final reference is 1.1050, the position loses $500 even though the euro rose relative to that initial spot quote.

Include costs consistently

If the entry rate already includes the dealer spread, do not deduct the same spread again. Add separately charged fees, collateral funding and any exit costs when applicable. A $1,000 gross result with $150 of additional costs leaves $850. For a deliverable contract, plan the gross currency exchange or an agreed unwind. Do not assume automatic cash settlement.

Set a risk process that can be executed

A planned exit level is not a guaranteed fill or a legal cancellation right. Liquidity can deteriorate and dealers can widen quotes. Record a maximum acceptable exposure, stress loss and source of settlement funds. A trade that cannot survive a plausible adverse move should not be justified by a small initial cash requirement.

Try it yourself

A long EUR 40,000 forward enters at 1.0900 and settles at 1.0750. Additional costs are $80. What is the net result?

Show the worked answer

A $680 loss: $600 from the rate movement plus $80 of additional costs.

Further reading

Educational material. Numerical examples are hypothetical and exclude costs unless stated. Forward contracts create binding obligations and may require collateral or credit approval. Actual terms, access and risks depend on the agreement and jurisdiction.

Continue learning