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I'm looking at EUR/USD forward rates here: http://www.investing.com/currencies/eur-usd-forward-rates

Can someone explain, in very simple terms, what do the bid/ask prices mean? And what is the difference between a forward contract and a future contract in this case?

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what do the bid/ask prices mean?

For any trade to take place, the price a buyer is will to pay and the price a seller is willing to accept must match. This does not happen.

So the buyer indicate the max price they are willing to pay. This is call bid [as they are trying to bid for an item and may not get it].

Similarly the seller will indicate the lowest price at which they are will to sell, i.e. the minimum price they ask for an item and may not get it].

So the exchanges always list the bid price, and ask price. So an existing [or new] buyer or seller know the positions and they may increase the bid price or lower the ask price depending on how they deem markets to move.

forward contract and a future contract in this case?

Future contract as agreement between buyer and seller to buy an item at a specified price and a specified future date. Depending on the item, the exchange generally governs most of the parameters including the date when these contracts mature.

Forward contracts are similar to future except that most parameters are customised between buyer and seller.

  • Good answer, but a small detail. The bid is the max price of all current actors attempting to buy in that particular market. So if you are attempting to sell one of these contracts right now this is the best price you can hope to get right now. Similarly the ask is the minimum of all actors currently attempting to sell. – rhaskett Nov 30 '15 at 17:31
  • @rhaskett Agreed. Not sure how I want to edit and incorporate your suggestion. Feel free to edit. – Dheer Nov 30 '15 at 17:38
  • @Dheer one important difference is that Future contracts are traded on a regulated exchange while Forward contracts are traded OTC. You could trade a contract with exactly the same parameters as a Future contract, but if you do it OTC it is called a Forward contract. – Octoplus Dec 30 '15 at 9:49
  • You have missed the crucial point - that the forwards are quoted in forward points, i.e. the number of basis points that should be added to the spot rate to determine the forward rate (for example see here). – Chris Taylor Dec 30 '15 at 10:21

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