1. Forward outrights
Although spot is settled 2 working days in the future, it is not considered in the foreign exchange market
as ‘future’ or ‘forward’, but as the baseline from which all other dates (earlier or later) are considered.
An outright is an outright purchase or sale of one currency in exchange for another currency for
settlement on a fixed date other than the spot value date. Rates are quoted in a similar way to those in
the spot market, with the quoting bank buying the base currency on the left side and selling it on the
right side. The term short date (see later in this chapter) is used for settlement on a date other than spot
but less than 1 month after spot, and the term forward outright is therefore generally reserved for
settlement later than that – i.e. at least one month after spot – although short dates are really only a
particular range of forward outrights

2. Example 1 The spot USD/CHF rate is 1.7166/1.7171, but the rate for value 3 months after the spot value date is
1.7144/1.7151. The spread (the difference between the bank’s buying price and the bank’s selling price) is wider in the
forward outright quotation than in the spot quotation. Also, in this example, the dollar is worth less for delivery in the
future than for delivery on the spot date. USD 1 buys CHF 1.7144 in 3 months’ time, as opposed to CHF 1.7166 spot. In a
different example, the dollar might be worth more for delivery in the future than on the spot date.

12. Discounts and premiums When the base currency interest rate is lower than the variable currency rate, the
forward outright exchange rate is always greater than the spot rate. That is, the base currency is worth more
units of the variable currency for delivery forward than it is for delivery spot. This can be seen as compensating
for the lower interest rate: if I deposit money in the variable currency rather than the base currency, I will
receive more interest. However, if I sell forward the maturing deposit amount, in an attempt to lock in this
advantage, the forward exchange rate is correspondingly worse so I lose the advantage. In this case, the base
currency is said to be at a premium to the variable currency, and the forward swap price must be positive. At
the same time, the variable currency is said to be at a discount to the base currency.
When the swap price is positive, and the forward dealer applies a bid/offer spread to make a two-way swap
price, the left price is smaller than the right price as usual. When the swap price is negative, he must similarly
quote a more negative number on the left and a more positive number on the right in order to make a profit.
This can be seen in Example 5 above, where the swap price was −0.0058/−0.0044.

13. The currency with the higher interest rate is at a discount and the currency with the lower interest rate is at a premium.
When the base currency is at a premium and the variable currency is at a discount, the forward swap points are positive and
the left price appears smaller than the right price. When the base currency is at a discount and the variable currency is at a
premium, the forward swap points are negative and the left price appears bigger than the right price.

27. Synthetic agreements for forward exchange (SAFEs) SAFES are used very little now, but we have included them here
for completeness. A SAFE is an off-balance sheet forward-forward foreign exchange swap. There are two versions of a
SAFE – an FXA and an ERA.
An FXA (forward exchange agreement) exactly replicates the economic effect of a forward-forward in the cash market
which is reversed at the first settlement date of the forward-forward in order to take a profit or loss. A price for an
FXA is quoted in the same way as a forward-forward price, and is dealt in the same way. A forward-forward swap
results in two cash settlements, each for the whole amount of the deal. An FXA, however, is settled in a manner
analogous to the way an FRA is settled. On the nearer of the two forward dates, a settlement amount is paid from one
party to the other to reflect the movement in rates between dealing and settlement, using an agreed settlement rate.
The settlement formula ensures that the result is economically the same as the profit or loss would be with a cash
forward-forward. To do so, it takes account of the movement in the spot rate from dealing to settlement, as well as
the movement in the forward swap points. This is because, although a forward dealer takes a position on the basis of
his expectations of swap movements, his profit or loss is also affected to some extent by spot rate movements. The
reason for this is discussed in Chapter 10. As with an FRA, the settlement formula involves an element of discounting,
because the settlement is made at the beginning of the forward-forward period