Topic 1: Using Forward Outrights

Who Uses Forward Outrights?

A forward outright (also known as an outright) is similar to a spot trade. The difference being that the value date of a spot trade usually occurs two days after the trade date – whereas with a forward outright the value date is sometime after the spot value date.
Bank traders do not trade forward outrights with each other in the wholesale market. Instead they trade the individual components of the forward outright, that of both the spot rate and the swap points. Forward outrights are used by banks’ clients, including corporate treasury groups and investment and hedge fund managers.
We will look at the usage of forward outrights by:

Use of Forward Outrights by Corporates

Corporates can face foreign exchange exposures on a daily basis as part of their business. It might be that they source their raw material needs from overseas and/or that they export to overseas markets. Large unexpected currency rate movements can quickly undermine a company’s business strategy. Corporates might use forward outrights to hedge against this risk.
Let’s take a look at two examples:

Hedging a Once-off Future Receivable

A manufacturing company in the UK sells machinery to both the US and countries in the eurozone.
In three months’ time the company expects to receive USD 1,250,000 from a US customer and EUR 2,800,000 from a customer in France. The company could wait until it receives the money in three months' time and then sell the dollars and euro in the spot market. However, this is risky because the GBP could strengthen against EUR and USD, thus reducing the value of the company’s receivables.
Using forward outrights, the company can lock in exchange rates today for the conversion of these currencies into GBP in three months’ time. This can provide an effective hedge against future exchange rate movements.
At which forward outright rates will the company trade, if the following market rates are given?