Forward exchange contracts are...

Forward exchange contracts are...

• A. They are private agreements between two parties
• B. They have flexible maturity dates
• C. They do not involve any deposit or collateral
• D. They are standardised contracts traded on an exchange

Answer: (D)

Forward exchange contracts are private agreements between two parties to exchange currencies at a fixed rate on a specified future date. Because they are negotiated directly in over-the-counter markets, they can be customized for exact amounts, currencies, and settlement dates, so there is no standard contract and no exchange trading. This also means they carry counterparty risk and generally don’t involve the daily settlement and margin requirements that futures contracts have on an exchange. The description of standardized contracts traded on an exchange would apply to futures, not forwards.

Forward exchange contracts are private agreements between two parties to exchange currencies at a fixed rate on a specified future date. Because they are negotiated directly in over-the-counter markets, they can be customized for exact amounts, currencies, and settlement dates, so there is no standard contract and no exchange trading. This also means they carry counterparty risk and generally don’t involve the daily settlement and margin requirements that futures contracts have on an exchange. The description of standardized contracts traded on an exchange would apply to futures, not forwards.