ABSTRACT
In the outright forward market, banks quote exchange rates for transactions to be effected at some date in the future. The heterogeneity of dates quoted for outright forward exchange is greater than for swap exchange. The high correlation between spot exchange rates and outright forward rates for different maturities strengthens the interdependence of market-making activity in outright forward exchange markets with that in spot and swap exchange markets. Banks can summarise in one of two ways their inventory position in the foreign exchange markets across the spot, swap and outright forward markets. This chapter focuses on 3-month maturities in both the swap and outright forward markets. Bid-offer spreads in the outright forward exchange market are typically greater than in the spot exchange market. Outright forward exchange turnover is almost entirely with customers rather than between market-makers. Commercial turnover in outright forward and swap exchange declines with maturity into the future.
