The forward currency market consists of two instruments: forwardoutright deals and swaps. A swap deal is unusual among the rest ofthe foreign exchange instruments in the fact that it consists of twodeals, or legs.26All the other transactions consist of single deals. In its original form,a swap deal is a combination of a spot deal and a forward outrightdeal. Generally, this market includes only cash transactions.Therefore, currency futures contracts, although a special breed offorward outright transactions, are analyzed separately.According to figures published by the Bank for InternationalSettlements, the percentage share of the forward market was 57percent in 1998 (See Figure 3.1). Translated into U.S. dollars, out ofan estimated daily gross turnover of US$1.49 trillion, the totalforward market represents US$900 billion.In the forward market there is no norm with regard to the settlementdates, which range from 3 days to 3 years. Volume in currency swaps longer than one year tends to be light but, technically, there is noimpediment to making these deals. Any date past the spot date andwithin the above range may be a forward settlement, provided that itis a valid business day for both currencies. The forward markets aredecentralized markets, with players around the world entering into avariety of deals either on a one-on-one basis or through brokers. Incontrast, the currency futures market is a centralized market, inwhich all the deals are executed on trading floors provided bydifferent exchanges.Whereas in the futures market only a handful of foreign currenciesmay be traded in multiples of standardized amounts, the forwardmarkets are open to any currencies in any amount. The forward priceconsists of two significant parts: the spot exchange rate and theforward spread. The spot rate is the main building block. The forwardprice is derived from the spot price by adjusting the spot price withthe forward spread, so it follows that both forward outright and swapdeals are derivative instruments. The forward spread is also knownas the forward points or the forward pips. The forward spread isnecessary for adjusting the spot rate for specific settlement datesdifferent from the spot date. It holds, then, that the maturity date isanother determining factor of the forward price. Just as in the case ofthe spot market, the left side of the quote is the bid side, and theright side is the offer side.
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