The price of a forward contract is based on the spot rate at the time the deal is booked, with an adjustment, which represents the interest rate differential between the two currencies concerned.
For example, you need to buy US dollars in three months time. Say US interest rates are higher than S$ interest rates. The pricing principle assumes that HSBC buys US dollars now, paying for the dollars with S$, in order to meet our obligation to you under the contract in three months time. We pass on to you the benefit of the higher rate of interest we earn on the dollars. The adjustment to the spot rate means that the forward contract rate would be more favourable than a spot deal rate. The reverse would apply if US interest rates were lower than S$ rates. |
The world's local bank
