Forward markets world-wide are afflicted by several problems:
Lack of centralization of trading
Illiquidity
Counter party risk
Foreign Exchange Forwards
Interbank forward foreign exchange markets are priced and executed as swaps.
This means that currency A is purchased vs. currency B for delivery on the spot date at the spot rate in the market at the time the transaction is executed.
At maturity, currency A is sold vs. currency B at the original spot rate plus or minus the forward points; this price is set when the swap is initiated.
The interbank market usually trades for straight dates, such as a week or a month from the spot date.
Three- and six-month maturities are among the most common, while the market is less liquid beyond 12 months. Amounts are commonly $25 million or more and can range into the billions.
Customers, both corporations and financial institutions such as hedge funds and mutual funds, can execute forwards with a bank counter-party either as a swap or an outright transaction.
In an outright forward, currency A is bought vs. currency B for delivery on the maturity date, which can be any business day beyond the spot date.
The price is again the spot rate plus or minus the forward points, but no money changes hands until the maturity date. Outright forwards are often for odd dates and amounts; they can be for any size.
The most commonly traded currencies in the forward market are the same as on the spot market: EUR/USD, USD/JPY and GBP/USD.
