Forward contract: what is it in simple words

In addition to exchange contracts, there are quite a lot of other instruments for concluding transactions, which are similar in many ways, but, nevertheless, have differences. These include forward contracts , which resemble the familiar futures - one of the main instruments of the derivatives market.
Any transaction pursues the goal of either making a profit or insuring its risks, and therefore forward contracts have a close connection with the real economy, while regular Forex trading involves, in most cases, simple speculation, which can be confirmed by the constant change in the rhetoric of analysts. From this article you will learn:

1. Forward contract - what is it?
2. Types of forwards
3. Conclusion

Forward in a nutshell.

The most precise definition of a forward contract will be as follows: “A forward is an agreement between a buyer and a seller (supplier). Under the terms of which, the parties undertake to fulfill their obligations on the day of the future transaction, also agreed upon when concluding a forward contract.”

In simple terms, the seller or supplier undertakes to sell or sell the subject of the transaction specified in the contract within the appointed time. The buyer, in turn, under the terms of the contract, will be obliged to buy this subject of the transaction. For example, a woodworking machine. Of course, on the calendar date specified in the forward contract.

Moreover, in the terms of a forward contract there may, and often are, additional criteria for conditions regarding the object of the transaction. Well, for example, such parameters as place of delivery/transaction, quality and volume of goods. If we are talking about weight, then such components as weight in gross or net form are also specified. And sometimes the contract also discusses such subtle nuances as the type and presentation of packaging at the time of transfer of the goods.

Disadvantages of contracts

The main disadvantage of the contract is the lack of room for maneuver . After all, the obligation of the parties to fulfill their part of the agreement does not give the opportunity to terminate the contract or modify its terms in any way before the established date. Due to the absence of a secondary forward market, resale of the contract becomes completely impossible. This, in turn, leads to a definitely low liquidity of the instrument with a very high risk of failure of one of the parties to fulfill its obligations. Rigid trading frameworks force market participants to look for various loopholes. For example, the practice of concluding contracts that provide for the possibility of terminating contracts by agreement of two parties or on the initiative of one party, but with the obligation of subsequent payment of compensation, has now become quite widespread.

The number of participants in the forward market is strictly limited by a number of norms and standards. In order to purchase or sell a forward contract, trading participants must have a line of credit, a high rating and, of course, stable financial contacts with banks. The disadvantage of forward transactions for participants is also the limited ability to choose a partner bank, so they have to accept the conditions put forward by financial institutions in fact. Some difficulties are also caused by the search for partners, since finding a side willing to take the opposite position is not very easy. This situation leads to insufficient popularity and activity of the forward contracts market.

Forward & futures

Even the translation of the term “futures” from English has almost the same meaning as the term “forward”. So Futures contract , translated as “future contract”, or “contract for the future”. As mentioned earlier, a forward contract is carried out outside of a formal exchange. Therefore, unlike a futures contract, a forward is not bound by any standardized conditions. Or restrictions, such as a futures contract, option or swap, which are subject to certain obligations by the exchange.

But the over-the-counter trading of forwards, despite its “freedom of action,” entails one, I would say, significant drawback. In the interpretation of unreliability, this disadvantage of over-the-counter trading can be interpreted as “additional risks.” The fact is that there is no clear control over the entire process of this agreement, right up to its final execution.

Well, no, that’s all! There are no specially designated bodies that would monitor specific financial forward transactions. Unlike futures contracts, where they are traded on the trading platform itself, the exchange provides them with complete transparency. Absolute control and guarantee of fair execution on both sides of counterparties.

Benefits of contracts

A forward contract is a universal financial instrument that has certain significant advantages over others similar to it.

The main advantage of the transaction is its individual nature, which makes it possible to hedge risks very professionally.

Forward arrangements do not involve the withdrawal of additional funds, such as commissions. If we talk about privileges for banks, we can highlight the possibility of establishing the value of the underlying asset and dictating their terms of agreement, in view of the fact that the transactions are over-the-counter in nature.

Example of a forward contract

The most primitive example of a forward contract can be called the most ordinary production transaction. Let's imagine that a brick factory produces facing bricks. Due to the fact that there has been some stagnation in its implementation, the management of this enterprise makes a decision on the forward contract.

In this case, agents representing the brick factory offer to conclude a forward agreement with some large and prestigious construction organization. The contract specifies conditions such as delivery time. Let's say it's October 1st. And the forward contract stipulates that the brick company will sell to the construction organization a huge batch of its product at current prices. Naturally, in addition to the volume of bricks, the contract also stipulates the size and type of product, place of delivery and packaging containers. And also, proper quality and a warranty period against weather conditions. A kind of expiration day is described, as with futures.

Distinctive features of forward contracts[edit | edit code]

• They are binding and non-negotiable;
• They are compiled taking into account the specific requirements of the client and are not subject to mandatory reporting;
• During negotiations, the following must be determined: the size of the contract, the quality of the supplied asset, the place and date of delivery.

The main advantage of these contracts is that the price is fixed at a future date. The main disadvantage is that if prices change by the settlement day in any direction, counterparties cannot break it[1].

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That is, all the necessary clauses and parameters of the contract are established individually. And they are written down in free form, based on the preferences of the parties’ agreement. From the above-described context, we can safely state that, according to the principle of exchange and over-the-counter trading, a forward contract is fundamentally different from futures.

See if among the futures contracts you can find hundreds, and sometimes even thousands of matches, according to the main parameters. It is unlikely that similar forms can be found in the total circulation of over-the-counter forward contracts. I really doubt that there will be at least a couple of three forward contracts that completely, or at least partially, coincide in most terms!

Features of the domestic forward market

Forward transactions are in greater demand abroad than in Russia. Domestic financial analysts argue that these contracts have a high level of risk, are largely dependent on chance and do not make it possible to accurately predict the result. However, the forward is gaining momentum in the Russian market, and the procedure for concluding and conducting such transactions is regulated at the legislative level.

To reduce the level of risk under forward contracts, forward exchange transactions appear that do not change their essence, such as a transaction with collateral or a transaction with a premium.

A transaction with collateral involves payment by one party to the other party of a portion of the value of the asset, which is recognized as collateral and ensures that the party fulfills its obligations. The amount of the collateral is determined by the counterparties by mutual agreement and can ensure the interests of both the seller and the buyer.

A premium deal is a type of contract in which one party pays the other a certain premium, giving it the right to refuse the deal or change its terms.

And yet, abroad, forward transactions are protected by law more reliably than here, and therefore are more popular. In Russia, this financial instrument needs to be developed and improved.

Forward liquidity

Futures, since this type of derivative instrument is standardized, has one of the highest liquidities. Not only in comparison with forward contracts, but in general, among other financial instruments. This is based on the fact that these derivative assets are quite easy to buy on exchange trading platforms. You can also get rid of them with maneuverability. This comfort of trading operations is compensated by relatively low commissions for spreads and costs in the form of maintaining a trading account.

Forward contracts are less mobile in this regard. Again, due to the lack of their standardization, it is sometimes quite problematic to find a counterparty to agree on such transactions. Not to mention that often such an opportunity simply does not exist. Here it is worth considering the fact that this type of financial transactions is in the nature of a highly specialized business. This nuance, by the way, follows from the very principle of the forward, that it in itself is not intended to make a profit. But rather, to preserve your own capital!

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Positions of the forward sides

Depending on whether a particular party's claims or obligations predominate, the appropriate forward contract position may be selected:

• a short seller position means a larger amount of the underlying asset sold compared to purchased (liabilities exceed claims);
• long position of the buyer - the quantity purchased exceeds the quantity sold (requirements exceed obligations).

The party taking a short position assumes that the market price of the asset will decrease, so it is urgent to sell it before it falls critically low. This policy is called short-selling.

And the side with a long position expects prices to rise, so it prefers to buy with hope for the future (bull play).

Main characteristics of a forward contract

The forward's underlying asset.

The underlying asset of a forward contract can be based on various types of values. These may include manufactured and non-manufactured goods. Currency pairs and precious metals. Central bank interest rates and energy resources. For example, commodities such as oil or gas.

Scope of delivery

For each forward asset object, a corresponding unit of volume is assigned. If it is oil, then the unit of volume will be a barrel. If it is gas, it means cubic meters. Interest rates - interest, currency - currency, etc.

Delivery time or date

This is actually the date upon which the “first” party (seller / supplier) is obliged to provide the underlying asset of the forward. Of course, for the entire volume, quantity and other conditions specified in the contract.

Forward price

The price of a forward contract is the price that was agreed upon and signed at the time the forward contract was drawn up. This price may change over time by mutual agreement of both parties.

Delivery price of the underlying asset

When the asset sale date, that is, the delivery date, arrives, the price of the underlying asset remains unchanged. However, this price remains unchanged throughout the entire forward period. In other words, this price is as stated at the time the contract was drawn up. So it does not change until the underlying asset is sold.

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Main components of a forward

Forward contracts have the following basic characteristics.

1. The subject of the contract is the asset being sold. This can be either a real product or a financial instrument (for example, an interest rate).
2. The quantity of the asset to be delivered. Should be indicated in units convenient for the client.
3. The delivery date of an asset is firmly fixed and cannot be changed. It is advisable to determine the time of delivery of the asset.
4. Delivery (execution) price is the amount paid by the buyer of the asset to the seller (fixed in the terms of the contract and cannot be changed).
5. Forward price is the same delivery price, but not constant, but determined for a specific time point.
6. The forward agreement price is the difference between the forward price and the delivery price. It may need to be calculated if the forward contract is resold on the secondary market. In such conditions, the forward price at the time of resale of the contract is taken as the first indicator.

NOTE! The forward price can be called the delivery price of a contract concluded at a given time.

Example showing the difference between the delivery price and the forward price

Forward contract 1 for the delivery of shares in favor of September 10, 2017 was concluded on June 1, 2021. Price condition – 120 rubles. per share. On this day, the delivery price coincides with the forward price. On July 1, shares are quoted at 130 rubles. The delivery price remained the same (it does not change), the forward price became 130 rubles. On this day, Alpha entered into forward contract 2 to sell another batch of shares on the same date. In contract 2, the delivery price will already be 130 rubles, since it has changed in the market. On September 10, 2021, Alpha shares are quoted at RUB 110. This will be the forward price. But she will have to pay the delivery price - under contract 1 it will be 120 rubles. per share, and under contract 2 - 130 rubles. per share.

Types of forward contracts

In the investment environment, forward contracts are usually divided into three main types. But besides this, absolutely all forwards can be classified according to the type of underlying asset. For example, if we are talking about an agreement for the supply of agricultural, industrial or energy products. Then we can say that the forward contract is a commodity contract.

And if, for example, we are dealing with various financial values ​​such as securities, interest rates or currency. In this case, forward contracts are usually called financial forwards. Moreover, both forward contracts can be concluded in two options, depending on the category of persons:

• Forward contracts can be concluded between banking institutions;
• A forward can be concluded between a bank and an individual (trader);
• Forward contracts can be concluded between the producer and the consumer;
• A forward can be concluded between a legal entity and an individual.

Accordingly, each of these categories automatically falls under one of the following types of forward contract:

Deliverable forward contract

This is the most ordinary forward. It ends with the fact that after delivery of the underlying asset, the transaction ceases to exist. That is, the delivery date has arrived, the first party, according to the terms of the contract, provided 10 tons of flour to its partner under a forward contract. I received funds, also under certain conditions, and that’s it. At this point, the agreement is considered exhaustive, both parties shook hands and now this forward does not exist.

Types of forward contracts[edit | edit code]

A forward can be settlement or delivery.

• deliverable
  forward (NDF) does not end with delivery of the underlying asset.
• A deliverable
  forward (DF) ends with delivery of the underlying asset and full payment under the terms of the transaction (agreement).

A forward over-the-counter transaction (a transaction with deferred obligations) is a deliverable forward.

An open-ended forward is a forward contract for which the settlement date (execution date) is not specified.

Forward asset price

— the current price of forward contracts for the corresponding asset. Set at the time the forward contract is concluded. Settlements between the parties to a forward contract occur at this price.

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Settlement forward contract

This type of forward contract does not imply the delivery of any raw materials or goods. In general, this type of contract does not include the delivery of anything, as the end of the contract. Based on the name of the contract itself, some kind of calculation is implied here. What is the calculation? Obviously, the calculation is made in monetary terms. Right! The settlement group of forward contracts includes those contracts that are directly related to national currencies.

Forex forward

Despite the great similarity with the previous type of contract, this forward was classified as a separate type of contract for a reason. The fact is that, unlike a settlement forward contract, a currency forward implies an exchange of currencies. Look, if the above-mentioned contract is settled in any currency, then only an exchange is carried out here. After all, the exchange of national currencies, with their different exchange rates, at a given time, is far from the same thing!

Forward currency contracts

The general characteristics of a forward currency contract provide for preliminary clarification of the terms of the partnership according to the following parameters:

• contract currency;
• transaction amount;
• exchange rate;
• payment date.

The duration of forward transactions can range from 3 days to 5 years. The most common terms of contracts are terms of 1, 3, 6 and 12 months from the date of conclusion of the contract. At its core, a forward foreign exchange contract belongs to the category of banking operations. It is not standardized and can be adapted to any situation. The market for forward transactions lasting no more than six months in the dominant currency pairs is rightfully considered quite stable. On the contrary, the market segment in which transactions are concluded for a period of 6 months or more is characterized by instability. Any implemented long-term transaction may cause significant fluctuations in rates on the foreign exchange market.

Pros and cons of forward contracts

As mentioned above, forward contracts are concluded in a kind of over-the-counter markets. Unlike their sister futures contracts, which have specific standardization. This state of affairs in relation to forward transactions entails a number of not only advantages, but also significant disadvantages.

Among the prerogatives of forwards, it is impossible to express any fundamental or primary advantages. They are all on the same level in terms of priority. For example, concluding a forward contract does not require additional costs. In the form of commission costs for servicing a trading brokerage account and commission costs for the size of the spread. There are also no costs for transferring positions through midnight (swap), and no additional fees are required, such as collateral.

Advantages of forward transactions.

The advantages of forward contracts include a wide choice regarding the terms of execution of these contracts. There are no strict restrictions due to mandatory standardization, in contrast to the same futures contracts. Moreover, forward contracts do not require systematic reporting of the volume of the transaction.

Disadvantages of forward transactions.

The disadvantages of this type of contract include the lack of guarantees. First of all, guarantees that one of the parties simply does not fulfill its mandatory conditions. With this development of events, the other party to the forward contract will only have to rely on legal protection. And this, as you yourself understand, will lead not only to additional expenses, but also to the loss of precious time. I’m already afraid to imagine what will happen to the raw materials in this case, if we are talking about a perishable product.

Perhaps this also includes the difficulty of reselling a forward contract on the secondary market. Again, due to the fact that this operation is not entirely legal. In addition to this disadvantage, low liquidity also falls under the negative characteristics of this type of over-the-counter contracts.

Risks of forwards specific to the Russian Federation

Equating forward transactions to games and bets, experts insist on their predominantly risky nature - the impossibility of completely calculating the result and the great influence of random events on them. The meaning of this equation is the absence of judicial protection for such transactions, because betting is a voluntary matter, unlike contracts, where failure to fulfill obligations provides for certain sanctions.

Resolution of the Constitutional Court of the Russian Federation dated December 16, 2002 No. 282-O indicated the unlawfulness of classifying forward transactions as bets and refusing judicial protection regarding them, since the risk in games and bets and in forward transactions is of a different nature.

1. The gaming risk is created by the excitement of the players themselves, and with forward the risk is of an entrepreneurial nature and is associated with the characteristics of the market, without bearing the characteristics of specific participants.
2. In contrast to the goal of the game and bet - to enjoy the process, receiving benefits if possible, the main goal of the transaction, like any business activity, is to make a profit, reducing risks if possible.

Recent legislative changes state: if at least one of the parties to a forward transaction is a legal entity licensed for banking operations or market activities, then forward transactions with it will be protected in court.

FOR YOUR INFORMATION! Abroad, forward transactions are very common and protected by law, but in our country this market segment needs further improvement and development.

Hedging risks when conducting a forward contract

Among entrepreneurs, banks, investors, traders and other business individuals, hedging risks through the use of forward contracts is extremely popular. Because the essence of the forward contract process itself involves hedging risks. And not at all making a profit, as a novice investor who is not privy to the subtle nuances of this type of investment might think. Here are the main risks involved when concluding one or another type of forward contract:

• Commodity risk – This is usually associated with all sorts of factors. For example, such economic cycles as inflation , stagnation or deflation . In general, this type of risk is associated with such economic processes. And as they occur, changes in supply and demand will certainly affect monetary and commodity relations.

• Currency risk – Unlike the previous type of hedging risk when conducting a forward transaction, here the risk is more resistant to economic cycles. Let's say directly that if inflation or deflation occurs, this will definitely affect monetary and commodity turnover. Then in the foreign exchange market, the national foreign exchange assets themselves are more resistant to these economic factors.

• Interest rate risk – No investor is insured against this class of risk. Not an institutional investor, not a private trader, not an entrepreneur. Since a change in the key interest rate of any state, kingdom or confederation will certainly affect all the valuable components of the life around us!

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Hedging with forwards

Hedging is a mechanism for reducing contract risks. It involves opening financial transactions that can compensate for losses if the market turns unfavorable. The purpose of hedging is to minimize possible losses due to fluctuations in market conditions.

For example, when trading currency, it is not always possible to predict whether the exchange rate will rise or fall. Let's assume that there will be a profit on the contract in case of an increase. In this case, hedging will consist of concluding in parallel with this a contract that will give a gain if the exchange rate decreases. Naturally, the profit will be less, but the possible loss will be less.

In business practice, it is customary to hedge the following types of risks:

• currency, arising as a result of exchange rate fluctuations;
• interest rate, the reason for which lies in changes in securities quotes;
• commodity, associated with price dynamics, inflation and other economic factors.

IMPORTANT! The key principle of hedging is to reduce risks, but not to take advantage of the situation in order to obtain additional profit.

An example of forward hedging. The entrepreneur plans to purchase imported goods abroad in the next quarter. To complete this transaction, he will need currency. But it is unknown what the exchange rate will be in a few months, and the businessman decides to hedge using a forward. He enters into a forward agreement with the bank to purchase currency at the current exchange rate. Now he is insured against losses if currency quotes rise, but will not be able to make a profit if the currency price decreases.

ATTENTION! A forward contract is only one way to hedge. Futures, options, swaps and other financial instruments are also used to manage risks.

The essence of risk hedging when conducting a forward contract using an example

Let's give the simplest production example. Purely to present the general essence of why a forward contract takes place in a financial relationship. Let's imagine an enterprise that produces seasonal shoes - boots based on polyvinyl chloride (PVC shoes).

At a certain period of the season, that is, with the onset of winter, this enterprise faced the problem of sales. Because raw materials that are not put into circulation of the product have the property of “ossification” over time. Then the thorny question of its use arises. In these circumstances, a forward contract will be an ideal solution for the management of the organization.

It is noteworthy that an undeniable advantage when concluding a forward contract is at a given point in time. For the manufacturer, there will be the fact that, firstly, this volume of production does not necessarily have to be produced at the time of drawing up the contract. And secondly, the enterprise’s warehouse does not necessarily have to have the required amount of products.

Long and short positions in the forward market

Swap agreements are used to extend the duration of the open position of currencies. Swap currencies are quoted at forward points. These points are calculated by differentiating the interest rates of a particular pair.

Quoting is obtained in three definitions:

• Positive – the quoted tariff is higher than the original one.
• Negative - the main currency unit is endowed with a high tariff.
• Zero – assumes equal value of interest rates for both currency units.

First, let's look at a comparison of transferring a long position. The trader opens this position on Forex for two currencies (USD/CHF) for 100,000 US dollars at a rate of 1.1275. The Swiss percentage is 3.75%, the American one is 5.25%.

It turns out that a person is forced to make a purchase of 10,000 US dollars at the Swiss exchange rate. But before that, take out a loan for a year at 3.75%. But after the acquisition, the participant in the transaction replenishes his account with 5.25% with this money.

With this process, the broker receives money for carrying out the transfer procedure in the amount of 0.25%. Since the current position for two currencies USD/CHF is open, then the swap number under these circumstances is accrued to the trading deposit, because the currency unit was purchased at the highest rate than sold.

There is a standard calculation principle:

Here:

1. Contract – total number of conditions.
2. Rate – the current value of the two currencies.
3. Diff – tariff differential.
4. Markup – broker's interest.
5. Days – number of days quoted by the swap.
6. Year Base – number of days in a year.

In the example, the swap is calculated as follows:

In US dollars, the swap number will be 3.86/1.1275=3.42. It turns out that the trader’s deposit for the period of transferring two currency units to the next day will be replenished by $3.42.

Sometimes the difference in interest rates is not higher than the brokerage commission, then the swap value is calculated from the trader’s deposit for any position.

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Model for carrying a short position in points on the forward market

The trader opened this position on Forex for two currencies (EUR/USD) for 100 thousand euros at a rate of 1.3350. One percentage value is 4.5%, in America it is 2.5%. It turns out that the trader sells 100 thousand, but before that he borrows them at 4.5%. Then he resells euros and at the same time buys American dollars, which he uses to replenish his account at 2.5%. Brokerage commission is 0.25%.

The calculation is carried out according to the same formula, except that the difference is replaced by amounts, that is, Diff –Markup is replaced by Diff +Markup. Then the swap will be calculated based on the transfer of the short position as follows:

It turns out that during the transfer of a short position on the EUR/USD currency pair to the next day, the resulting amount of American dollars will be withdrawn from the trader’s trading deposit.

The concept of swap point on Forex in examples

Conditions and requirements of the forward.

So, an enterprise enters into a forward contract with an intermediary consumer, for example, a large merchant. In the terms of the forward agreement, the parties stipulate the following conditions and requirements:

• Basic asset – Seasonal footwear, polyvinyl chloride based.
• Supply volume – 200,000 pairs.
• Delivery date – March 1, year “X”.
• Forward price – 1,000 rubles per pair.

Since these conditions completely satisfied the parties to the agreement, they refused to introduce additional requirements. Type “delivery price” and, as a consequence, “forward agreement price”. Now, when the delivery date arrives, there are at least three scenarios. And each of the possible options will have a different impact on both the side of the shoe company and the second party to the agreement - the merchant.

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Options for execution of a forward contract.

• Option one – When March 1st arrives, the price of the deliverable forward has not changed. In this case, both parties benefited. The shoe manufacturing organization was able to retain its workforce by providing work during the off-season of seasonal shoe sales. The businessman, in fact, paid a relatively low price for a huge batch of shoes. At a forward price of 1,000 rubles per pair of boots. And he sells these products at current prices as of March 1.

• Option two – When spring arrived, the manufacturer’s expectations were confirmed, and the market price for autumn and spring shoes became lower. Thanks to the forward agreement, he was able to sell his products at prices that were now favorable to him. If we consider the concept that the amount he will receive is many times larger. In relation to the current market price of boots at a given time.

• Option three – The price for the object of the forward agreement has increased. In this case, of course, the businessman remains the winner. Because, for example, if the market price of shoes is 1,200 rubles per pair, he will purchase them for 1,000 rubles. For the management of the organization, this combination of circumstances is the price to pay for the absence of risk and, as a result, keeping the entire enterprise “afloat”!

Types of forwards

There are three types of forward agreements:

• deliverable – that is, the underlying asset specified in the contract must actually be delivered and transferred from the seller to the buyer;
• settlement - the asset is not actually transferred, but on the specified date the difference between its market value and that fixed in the agreement is offset and compensated;
• foreign exchange – the parties exchange currencies, the rate of which remains unchanged.

Based on the type of underlying asset, forwards can be divided into 2 groups.

1. Commodity forwards – imply a material item of sale and purchase, such as:
   energetic resources;
2. metals;
3. agricultural products, etc.
4. Financial forwards – the underlying asset is a financial instrument:
   currency;
5. interest rates;
6. stock;
7. other securities and stock values.

If we take into account the parties to the contracts, we can highlight:

• forwards between banking organizations or between a bank and a client;
• forwards between trading and manufacturing enterprises.

Example of a commodity forward

The trader is studying the situation on the precious metals market and assumes that the price of platinum, which at the date of his research was about 1,600 rubles per gram, will rise. He enters into a forward contract to purchase platinum at a price of 1,700 rubles per gram for a period of 3 months. After the specified time, the platinum quotation is 1,900 rubles per gram. The trader will buy platinum at the price of 1,700 rubles fixed in the contract, immediately sell it for 1,900 rubles and will have a net profit of 200 rubles on each gram of valuable metal.

Example of a financial forward

The client wants to sell 10,000 euros to the bank, but not now, but in six months. He enters into a forward currency agreement with a banking organization. At the time of conclusion of the agreement, the euro exchange rate was 63 rubles. According to the rules of the contract, it is necessary to make a deposit in the agreed amount that suits the parties, let it be 20%. The client deposits 2,000 euros into the account of the banking organization at the specified rate. After 6 months, due to changes in the political situation, the euro exchange rate is 70 rubles. The client deposits the remaining amount - 8,000 euros, and the bank pays him the money in rubles at the increased exchange rate.

Legislative component of a forward contract

From a legal point of view, the attitude towards forward contracts is different in different countries. In countries with developed trade and financial relations, for example, the USA, Japan, China or the UK. Controversial issues regarding forward agreements are resolved very successfully in court.

In our country, things are not so rosy . Because financial market trading happened precisely in the 90s. When economic growth replaced planned growth, following the recent internal government restructuring.

The fact is that this type of forward contract, called a “settled forward,” is quite similar to a bet between two parties. Whether the future price of the object of the forward agreement will be higher or lower. Which, by the way, also equates to some elements of bets. And therefore, due to their mutual consent, the court cannot resolve this controversial issue that has arisen.

This “hole” in the legislation began to change in a stable direction only with the beginning of the 21st century. When the colossal number of lawsuits attracted attention already at the geopolitical level. Then, in the 2000s, the question arose bluntly: what is what? If you look at a forward contract as a bet or a bet, that is, as a way of gambling. Then there can be no talk of litigation.

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Specifics of contract trading

Trading in forward contracts does not have a clearly organized structure. After all, little competition in this industry gives banks some advantages in the form of the opportunity to impose their terms of partnership on other participants in the agreement. The income that forward foreign exchange contracts can generate largely depends on the ability to predict the future price of the asset underlying the agreement.

Of course, banks benefit because they have access to a huge amount of information and they have professional analysts. This, in turn, leads to the formation of a large-scale and active supply market, the over-the-counter stock market. Forward contracts are signed not only for a real amount of funds, but also for a conditional one.

The latter situation, after the implementation of the agreement when a difference arises in the contract and market value of the underlying asset, guarantees one of the parties the obligatory payment to the other party only of the price difference. There is no actual exchange of currencies, shares, securities and other financial instruments.

Legislative documentation on forward agreements

If the forward agreement documentation specifically states the terms of the agreement as a financial transaction for the purpose of making a profit. Then any controversial issues were resolved in court. According to all legal acts, on the legislative basis on the securities market. In particular, we are talking about the instructions and regulations of the Central Bank of the Russian Federation:

• “On establishing limits on open currency positions and monitoring their compliance by authorized banks of the Russian Federation. To carry out forward agreements between banks or between a bank and a client.” No. 41 dated May 22, 1996.

• “On the procedure for maintaining accounting records of transactions, purchase/sale of foreign currency, precious metals and securities in credit institutions.” Defines a forward transaction as an agreement. As an obligation that is carried out with a delay of at least 3 days after conclusion. No. 55 of March 21, 1997.

• “On the program of socio-economic development of the Russian Federation for the medium term - 2002/2004.” Allowed transactions with deferred execution to be recognized as bets between parties. No. 910 of July 10, 2001.

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REPO transactions

Currently, agreements with a repurchase obligation, called “repurchase agreements,” are widely used. Their essence lies in the fact that an economic entity (usually a credit organization) acquires some property and at the same time, usually in the same agreement, undertakes to sell the same property to the seller under the first agreement.

In fact, in such a transaction, payment of the purchase price under the first agreement is equivalent to issuing a loan, the difference between the price of the first and the price of the second agreement is the fee for using a bank loan, and the time interval between the payment terms for the goods under the first and second agreement is the loan term. The property, which acts as the subject of the purchase and sale agreement, performs the function of securing the repayment of the loan, similar to that performed by the pledge.

REPO represents short-term operations, from one-day (overnight) to several weeks. With a repo, a dealer can finance his position to purchase securities.

There is a concept called “reverse repo”. This is an agreement to purchase securities with the obligation to sell them at a later date at a lower price. In this transaction, the person who buys the securities at a higher price is actually borrowing them against the security of the money. The second person providing a loan in the form of securities receives income (interest on the loan) in the amount of the difference in the prices of sale and repurchase of securities.

Now let us dwell in more detail on the legal characteristics of this type of transaction. According to clause “d”, part 2 of the instruction of the Central Bank of the Russian Federation “On establishing an open currency position and monitoring their compliance by authorized banks of the Russian Federation” dated May 22, 1996 No. 41, as already happened. A repo transaction consists of cash and forward parts: direct and reverse purchase and sale transactions.

The Central Bank proposed the following definition of a repo transaction: it is “an agreement to purchase/sell securities with subsequent mandatory sale/purchase at a price determined at the time of purchase/sale.

Some forms of pledge, known to the history of law, as well as the theory and practice of foreign legal systems, involve the transfer of ownership of the pledged item to the pledgee. However, the desire of law enforcement officials to circumvent the legal requirements regarding the impossibility of transferring ownership of the pledged property to the pledgee gives rise to phenomena that hardly fit into the framework of ordinary legal regulation and entail difficulties in their legal qualification. In other words, the struggle for the “purity of theory” collides with the needs of civil circulation.

There are also so-called “direct repos” and “sale-repurchase” repos (“purchase-reverse purchases”). Unlike “sale and repurchase” type repos, “direct repos” are concluded by the parties only if there is a general agreement between them to carry out repo transactions. Such an agreement clearly defines the rights, responsibilities of the parties and the procedure for settlements between them under transactions.

The legal regulation of this financial market institution is quite fragmented and disjointed. Thus, the placement of government bonds through repo transactions is regulated by the Temporary Procedure for Conducting Repo Transactions with Bank of Russia Bonds, approved by Directive of the Central Bank of the Russian Federation dated October 5, 1998 No. 374-u.

REPO transactions provide business entities with credit to their counterparties subject to the receipt of highly liquid collateral. Such operations, which have received worldwide recognition as a mobile financial instrument, were used in order, firstly, to bypass the restrictions associated with the special legal personality of credit institutions, and, secondly, not to use the cumbersome and ineffective collateral system adopted in Russian law . According to L.G.

It should be noted that a reverse repo transaction cannot be unambiguously interpreted as a preliminary agreement. The contract for the purchase and sale of securities is not real, but consensual, for the conclusion of which one consent is sufficient. However, if the subject of the contract cannot be transferred at the time of the transaction, then nothing prevents the conclusion of a regular contract of sale, contract, paid services, etc.

, indicating in it a certain point in time in the future as the due date. Considering that the essential terms of the purchase and sale agreement and the repurchase transaction are known, as a rule, at the time of conclusion of the agreement, the conclusion of a reverse purchase and sale in the form of a preliminary or main agreement depends on the will of the parties themselves, formulated in the subject of the agreement. The transaction itself for the reverse purchase and sale of shares may well be considered forward.

Currently, when considering disputes arising from repo transactions, courts usually classify them as sham transactions covering up collateral. The arguments of opponents of such transactions were formulated in a number of decisions of the Supreme Arbitration Court of the Russian Federation: No. 6202/97, 7045/97 and 1171/98 of October 6, 1998.

At the same time, it is obvious that a repo transaction is not a way to secure obligations, such as, for example, a pledge. A repo transaction has an independent legal nature, and each part of it (both cash and term) can be a standard purchase and sale agreement. However, as a rule, in such transactions the will of the parties is not aimed at obtaining the equivalent of the property sold, but, as noted above, the difference between the price of the original and reverse sales contracts.

Any of these agreements, without connection with the other, is of no value to the subjects. Securities sold under a cash agreement and purchased under a fixed-term agreement act as security for the obligations of the parties or as a value equivalent of the subject of the obligations other than money. A similar explanation for the need for repo transactions is given in the economic literature. So, I.T.

At the same time, M. Maslennikov Fr. A similar formulation by M.

Maslennikova about the “speculative” nature of such transactions seems quite familiar in the field of qualification of settlement-forward contracts, which the courts in a number of cases refused to provide judicial protection precisely on the basis of the speculative nature of the transaction. References in by-laws to a particular transaction, as stated, do not affect the position of the courts on this issue.

Let us dwell in more detail on the relationship between repo transactions and collateral agreements and, as a result, we will more clearly define the criteria that allow us to qualify this type of transactions as sham.

Formally, a repo transaction is a combination of two purchase and sale agreements. However, if you analyze its essence based not only on the literal interpretation of the text of the agreement, but also on the goals and essence of the actions that were pursued and performed by the parties, then it should be recognized that the purpose of the transaction is not the sale of property, but the temporary provision of financial resources “for the assignment of ownership rights on property" or "secured" by property.

As already noted, from the standpoint of judicial practice, such transactions are unacceptable. Thus, initially the plenums of the Armed Forces of the Russian Federation and the Supreme Arbitration Court of the Russian Federation in paragraph. 2 clause 46 of the well-known resolution No. 6/8 dated 01.07.96 “On some issues related to the application of part one of the Civil Code of the Russian Federation” categorically indicated that the current legislation “does not provide for the possibility of transferring property that is the subject of a pledge to the ownership of the pledgee.”

Any agreements providing for such a transfer are void, with the exception of those that can be qualified as compensation or novation of an obligation secured by a pledge (Articles 409, 414 of the Civil Code of the Russian Federation). Subsequently, by resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation dated October 6, 1998 No. 6202/97 (as well as subsequent ones - No. 7045/97 and 1171/98) it was established that, when concluding an agreement for the sale and purchase of shares (repo transaction) as security for a loan agreement, the parties meant a pledge, and not a transfer of shares into the ownership of each other on the basis of purchase and sale agreements, and therefore, the agreement for the sale and purchase of shares is void due to sham according to Art. 170 Civil Code of the Russian Federation.

It is quite obvious that arbitration courts proceed from the erroneous premise that any transaction that is externally similar to a pledge is such a pledge. In this case, the principle of freedom of contract is not taken into account (Article 421 of the Civil Code of the Russian Federation). Thus, the general rule “everything is permitted that is not directly prohibited” is violated.

In addition, the court, in our opinion, applied the analogy of the law here - which, by virtue of Art. 6 of the Civil Code of the Russian Federation is allowed only if the relationship is not clearly regulated by the parties to the agreement and there is no business practice applicable to these relationships. It seems that with regard to repo transactions it is quite acceptable to talk about the existence of a custom of business practice, taking into account, firstly, that such transactions are widely used in practice, and secondly, that the rules about them are provided for in the acts of the Central Bank of the Russian Federation (Order of October 24 1997

No. 02-469 “On approval of the Directives “On the procedure for drawing up and submitting reports by credit institutions to the Central Bank of the Russian Federation””; Directive of the Central Bank of the Russian Federation dated September 17, 1999 No. 639-U “On introducing amendments and additions to the Regulations “On servicing and circulation of issues of government short-term zero-coupon bonds””; Regulations of the Central Bank of the Russian Federation “On the procedure for concluding and executing repo transactions with government securities of the Russian Federation” dated March 25, 2003 No. 220-P).

Thus, the forward rate is calculated by adding a premium or subtracting a discount from the current spot rate.
Forward points are calculated as follows [p.33] If the forward points received have a positive sign, they represent a K From the sign they will be a discount and [p.33]

The quote for forward points provided by a bank dealer will look like this [p.34]

For the foreign exchange dealer operating in international markets, Reuters provides information on the current values ​​of forward pips rates for standard maturities. For convenience, they are quoted together with interest rates on deposits [p.34]

In Russia, due to the low saturation of the market with information on current exchange rates, as well as current interest rates on interbank ruble deposits, the process of calculating forward points is carried out independently by dealers, and the resulting values ​​may vary significantly in different banks. [p.35]

In the following Reuters information pages, forward points decreasing from left to right are additionally given a negative sign for ease of perception, indicating that they must be subtracted from the spot rate to obtain the forward rate. [p.36]

Sometimes you can find quotes for forward points in the form [p.36]

If forward points increase from left to right, then to find the outright rate for a value date earlier than spot, forward points are swapped and subtracted from the spot rate. [p.36]

If the forward points decrease from left to right, then to find the outright rate to the spot, the forward points are swapped and added to the spot rate. [p.36]

For example, you need to calculate forward points for a dollar to mark outright transaction with a value date 2 months and 10 days after the spot date. [p.37]

Assume that the forward points for standard periods with straight dates are [p.37]

For one day, the forward points of the 2nd month (the period between the 2nd and 3rd months) are respectively [p.37]

The required forward points for a period of 2 months and 10 days will be [p.37]

Suppose we have the following quotes for spot and forward points rates [p.37]

From here you can calculate the 3-month forward points of the pound sterling cross-rate to the German mark. To do this, you need to multiply the dollar spot rates to obtain the spot cross rates and subtract the outright cross rates from them. [p.38]

Since a standard swap transaction contains two transactions - one on the slot and the other outright, which are concluded simultaneously with one counterparty bank, then in their rates they have a common spot rate. One spot rate is used in the first conversion transaction with the spot value date, the second is used to obtain the outright rate for the reverse conversion. Therefore, the difference in rates for these two transactions is only in forward points for a specific period. [p.39]

In the case of increasing left-to-right forward points (the base currency is quoted at a premium), the exchange rate for the first swap transaction (pre-spot) must be lower than the exchange rate for the second transaction (spot). [p.39]

If forward points are decreasing from left to right (the base currency is quoted at a discount), the exchange rate for the first transaction should be lower than for the second. [p.40]

In this case, the current spot exchange rate can be used both for the value date (before the raccoon) and for the swap expiration date (directly on the slot). The main thing is that the difference between the two rates is the value of forward points for the corresponding period. The spot date here will always represent the forward date. [p.40]

The usual way. For the spot date, the spot rate is used, and for the value date tomorrow, the outright rate is used, equal to the spot rate plus forward points 1.5165 + 0.00032 = 1.51682. Schematically for AAA Bank the transaction looks like this. [p.40]

It is easy to see that the difference in the number of German marks at the end of the swap is 320 DEM in both cases. They represent the price or cost of the swap transaction, reflecting the size of the forward points, and therefore the difference in interest rates for a given period. In our case, AAA Bank bought 320 German marks more than it sold the next day, that is, we can say that in 1 day it earned 320 marks in the amount of 1 million US dollars, which it had on the swap value date. For a bank, this is equivalent to placing a deposit of 1 million US dollars, where the interest received is expressed not in dollars, but in marks. [p.40]

I. Carry out the opposite outright transaction on the same value date. However, there is a risk of changes in the exchange rate. The size of forward points is unlikely to change (it depends on the difference in interest rates), but the spot rate, which is part of the forward rate, may change. For example, by the time the transaction was closed, the spot rate had fallen to the level of 1.4970/80. The opposite outright transaction will result in a net loss as of April 18, 1995, since the bank executed it at a lower outright rate of 1.4970 + 0.0065 = 1.5045. [p.41]

AAA Bank asks another bank to quote it a 3-month USD/DEM swap for $1 million and receives the same value of forward points (since within a short period of time the interest rates for the two currencies did not have time to change, so the forward points remained unchanged for the period 3 months) 65 – 84. [p.41]

In a similar way, you can enter and change quotes for interest rates, forward points, gold prices, etc. [p.78]

Forward rate and its components. Forward rate calculation. Premium and discount (discount). Forward Bid and Offer points. Rule for calculating the forward rate. [p.71]

Forward points are also called swap points, forward difference or swap difference. They represent the absolute points of a given exchange rate (in units of the quote currency) by which the spot rate is adjusted when carrying out forward transactions, and reflect the difference in interest rates for specific periods between the currencies sold on international money markets - interest differential "rocent [p.33]

Using this formula, you can calculate the average forward points for the average outright rate (not taking into account the bid and offer sides). However, both the spot rate and the outright rate are quoted as double quotes. Forward points are also calculated as bid and offer. [p.33]

For example, returning to our example with the American investor, let's try to calculate the 3-month forward bid and opeg points for the dollar exchange rate to the USD/DEM mark. Spot dollar to German mark rate [p.33]

To find the forward rate, the outright dealer added up the forward points and spot quotes, respectively, on the sides bid spot and + bid forward and offer spot and + offer forward. [p.34]

The amount of margin (spread) between the bid side and the offer side when quoting forward points and the outright rate depends on the same factors as when quoting the spot rate, that is, on the nature of the counterparty, their relationship, market situation, size of the amount, etc. [p.34]

The FWDW page (Table 18) provides quotes for forward points in dollars against the pound sterling (which is the base currency). They are quoted by different banks, but generally reflect the current international level of these forward points. [p.35]

If forward points grow from left to right (the bid quote is less than the offer quote), then to find the outright rate for the value date further than the slot, forward points are added to the slot rate. [p.35]

For example, a foreign exchange dealer needs to quote the six-month outright rate of the pound sterling to US dollars. Since interest rates on sterling are higher than on US dollars, the pound will be quoted at a discount to the dollar. The dealer uses the FWDW reuter page, where for a period of 6 months (6M) he finds the following quote for 6-month forward points 49/46. The current spot GBP/USD rate is 1.5934/39 (Table 8). Since forward points decrease from left to right, they must be subtracted from the spot rate [p.36]

It is known that the USD/DEM spot rate is 1.4695-1.4705. Forward points for tomorrow t/n are equal to - 5.0 /-4.5. Since they decrease from left to right, this means that the dollar is quoted to the German mark at a discount (that is, interest rates on dollar deposits tom-next (t/n) are higher than on similar deposits in German marks - see Table 4 and Table 16). To obtain the outright val-tom rate, you need to swap the bid and offer sides for forward points and, according to the “ladder” rule, add them to the spot rate [p.37]

The size of forward points for broken dates can be calculated either using the above formula or using ready-made forward points quoted on the pages of Reuters. [p.37]

The difference between forward points for 2 and 3 months is for the bid side 65 - 41 = 24 for the offer side 84 - 57 = 27 [p.37]

Short swaps are quoted similarly to standard swaps in the form of forward points for the corresponding periods (overnight o/n, tom-next t/n). In this case, the calculation of transaction rates is based on the rules for calculating the outright rate for the pre-spot value date. [p.39]

For example, on 02/07/95, the currency dealer of AAA bank, BBB bank, asks to quote a one-day swap on tom-next terms for 1 million US dollars to the German mark. Using the Reuters FWDT terminal page, he quotes the value of forward points for the tom-next period (t/n) - 3.2/1.7. The spot rate is 1.5160/70, the average is 1.5165. [p.40]

If the BBB bank enters into a buy and sell swap transaction (and for the AAA bank - a sell and buy swap), then the bid side of the forward points corresponds to it - 3.2. [p.40]

Since forward points decrease from left to right, the exchange rate on the value date tomorrow (torn) must be higher in value than the rate on the end date of the swap - on the spot date. This can be achieved in two ways. [p.40]

In Russia, the market for forward dollar/ruble outright transactions is just emerging, so outright rates are often quoted in the form of a net rate for a specific forward date, without division into the current exchange rate and forward points. This is due to the difficulty in choosing the current exchange rate (either the today rate or the torn rate), as well as the inconvenience of calculating forward points due to the wide variation in the level of ruble interest rates among different banks. In this regard, for the same forward dates, different banks can offer different forward rates. The following is an example of concluding a one-day t/n swap transaction (with a formed ticket), often used by dealers to prolong an open currency position [p.91]