For currency investors, two different worlds exist--the spot market and the forward market. The spot market creates contracts between two parties and delivery occurs within two business days. Just like in the equity markets, there is a bid price and an ask price for currency exchange rates. The buyer of a currency receives the ask, or offer, price.
The forward currency market involves any transactions that mature past the two day spot market maturity. Keep in mind that the currency forward market is different from the currency futures market. In the futures market, two parties can agree to exchange currencies based on a negotiated price, but the contract does not expire in two days. Many companies speculate on currency movements by buying or selling forward contracts.If a corporation operates in U.S. dollars but pays its European suppliers in euros and it believed that euros were going to appreciate against the dollar, that company would want to lock in a forward contract that allowed it to buy euros at today's exchange rate. Forward contracts allow parties to prevent major fluctuations in their foreign currency transactions. There is no limit on the length that a forward contract can exist for, but both parties have to agree and most currency traders aren't willing to maintain very extended long-term bets.In a forward contract, you want to take a careful look at the bid and ask prices since they are often reversed. If you're a CFO of a corporation and want to start locking in forward contracts, you'll want to seek the advice of a professional at first. Reading the wrong bid and ask price on a forward contract can be detrimental.
