AUD USD forward rate curve can be defined as a forex trading chart that displays the financial transaction between the Australian dollar and the United States dollar that will hold or take place in the future. The AUD USD forward rate curve is based on the spot rate, attuned for the cost of carry and given as the rate that is used for the delivery of the Australian dollar and the United States dollar at a particular time in the future. The Australian dollar and the United States dollar forward rate curve can also be said to be a curve that displays the rate fixed for a future financial responsibility i.e. the interest rate on an AUD USD loan payment.
UNDERSTANDING AUD USD FORWARD RATE CURVE
In the forex market, AUD USD forward rate curveis a financial curve that specifies a predetermined obligation that must be met by the forex traders involved. For example AUD USD forward rate is seen when an American exporter with a huge number of export goods and services awaiting in Australia and decides to trade or sell 4 million Australian dollar in exchange for the United States dollar at an exchange rate of 5.4 AUD per one USD in a period of 4 months’ time. The forex trader or exporter is obligated to provide 4 million AUD at the agreed exchange rate and at the agreed date irrespective of the status of the export order or the exchange rate at is present at the forex market or spot market at that particular time.
USES OF AUD USD FORWARD RATE CURVE
AUD USD forward rate curve is greatly used by forex traders in the forex market for hedging purposes. This is based on the fact that currency forwards can be directed for precise requirements unlike other parameters which have fixed contract sizes and expiry dates including facts that they can’t be customized. Hedging is the process of a forex trader to protecting an existing trade position from an undesired move in the forex market.
AUD USD forward rate curve are also used in the determination of future values of AUD and USD andit is used as a settlement price for a forward contract. It is used to quote a financial transaction that takes place at a time in the future. In terms of bonds, a forward rate curve can also be used to calculate and determine bond future values. A forex trader can buy a 5 months bill and place a roll on another 5 months bill at the time it matures. The forex trader will be able to determine the spot rate for the 5 months bill but might not be able to determine the value of the 5 months bill that will be purchased 5 months in the future. Using a forward rate curve, it can be determined.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.