The forward market is generally known as a market where contracts are made to buy or sell currencies for future delivery. But even this overly simplified definition is somewhat confusing and vague to many. Therefore, before starting to describe the purpose and details of the forward market, we will need to be aware that the forward market is a part of the bigger picture – which is, the foreign exchange market. The foreign exchange market is a vast market that allows the purchasing power of one currency to reallocate to another currency. In other words, it is a place where one can trade a country’s currency for another country’s currency. Furthermore, the foreign exchange market can be broken into two markets: the spot market and the forward market. The underlining difference between the spot market and the forward market is timing; the spot market trades currencies for immediate delivery, whereas the future market trades currencies for a future delivery. But the scope of this discussion will only extend to the specifics of the forward market. Because participants can gain profit, hedge against risks and protect the value of a home currency, the forward market is a crucial contributor as to why the foreign market exchange is immense global market. To start off on the right idea, a more thorough definition of the forward market is that it is a market that deals with forward contracts that sets agreements between two parties to buy or sell an asset, such as security, at future point in time that is determined on the date the contract is made. In addition, trading currencies within the forward market is another approach to hedge against the exchange risk of fluctuating currencies. The forward market consists of four major participants: arbitrageurs, traders, hedgers, and speculators. All these participants are aware of the risks involved in entering into a forward contract and dealing with the forward market. First of the participants, arbitrageurs enter into the forward market to use forward contracts to eliminate exchange risk involved in transferring their funds from one nation to another. Second of the participants, traders are involved in the forward market to cover the risk of loss on export or import orders that are denominated in foreign currencies. Third of the participants, hedgers are mostly multinational firms that use forward contracts to protect their home currency value of assets and liabilities that are denominated in a foreign currency; for example, if the U.S. firm bought a security (an asset) from a Japanese firm through a forward contract, the value of this asset would not fluctuate on the balance sheet of the U.S. firm despite the fluctuations of the Japanese Yen. Last of the participants, speculators are different from the other participants because of the fact they embrace currency risk. Speculators are the only ones who expose themselves to currency risk by buying/selling forward contracts in hopes to profit from exchange fluctuations. The forward market would not be what it is without the use of forward contracts. To reiterate, a forward contract is “an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time”. Moreover, there are three specifications of a forward contract: (1) calls for delivery at a fixed future date, (2) has a specified amount of one currency against another currency, (3) the exchange rate is fixed at the time the contact is made. Because of the specifications of a forward contract, the forward market is unique and distinct from other markets, such as the futures market and the spot market. In addition, the forward market is selective because it exists in certain nations/countries. The forward market is available for five currencies: the euro, the pound sterling, the Canadian dollar, the yen, and the Swiss franc. Amongst these five currencies, the euro is often the currency that is traded the most in the forward market. Along with selective currencies, forward contracts are normally available in increments of 30-day, 60-day, 90-day, 180-day, or 360-day delivery. Overall, the conditions of forward contracts and availability of certain currencies/increments are main reasons why the forward market is exclusive and flourishing in the realm of international finance. Knowing that both the forward market and the futures market deals with a future delivery, most would assume that the forward market and the futures market are virtually the same, but this is hardly the case. Although there are similarities between the forward market and the futures market, most should be aware of the prevailing differences that sets each other apart. Starting off with what would seem the most distinctive between the two is market regulation. The forward market today is not regulated, whereas the futures market is regulated by the government. Also, the forward and futures are differentiated from one another because of the transaction method implied; forward market contracts are negotiated privately and directly between the buyer and seller, while futures market contracts are quoted and traded on an official exchange. This simply means that the transactions of forward markets are private, as the transactions of futures market are public and official. This alludes to the fact that forward contracts can be customized and the futures contracts are standardized. Moreover, knowing that the forward market is not regulated and private transactions occur can only mean that there are no guarantees for the buyer/seller if one or the other defaults. On the contrary, the futures market is able to guarantee the terms of a contract for its buyer and sellers because both parties involved must deposit a margin, which is basically an amount that must be deposited at the initial point of the contract. What an individual needs to take away from all this is that in the futures market: transactions are regulated by the government; public transactions occur; contracts are guaranteed; and all contracts are standardized, whereas in the forward market: transactions are not regulated; private transactions occur; contracts cannot be guaranteed; and contracts can be customized. Though there are many things to carefully consider before entering in the forward market, it still remains that the forward market is nothing less than a key contributor in the foreign exchange. With the forward market, participants can seek profitable opportunities to exist or use this market to hedge the risk that is involved in dealing with the exchange of foreign currencies. The forward market is nothing less than spectacular because what it contributes to growth of today’s international trade and exchange. Reference Investopedia. (2009, February 11). A Beginner’s Guide to Hedging. Retrieved May 8, 2003, from http://www.investopedia.com/terms/f/forwardmarket.asp Shapiro,A. & Sarin, A. V.(2009). [Review of the book Foundations of Multinational Financial Management]. The Foreign Exchange Market. 174 – 178.