What does "outrights" mean in the context of the FX market?

By Casey Murphy AAA
A:

The term "outrights" is used in the forex (FX) market to describe a type of transaction in which two parties agree to buy or sell a given amount of currency at a predetermined rate at some point in the future. This type of transaction is also known as a forward outright, an FX forward or a currency forward. A forward outright transaction is mainly used by parties who are seeking to hedge against adverse currency fluctuations or to stabilize a stream of future cash flows by taking advantage of the current rate.

For example, let's say a U.S company known as ZXY imports most of its materials from the U.K. every six months and the executives believe that the value of the domestic currency is going to decrease. If the domestic currency's value does decrease, it will take more U.S. dollars to buy the same amount of materials. In this case, a forward outright transaction would be appropriate: the two parties involved can agree on a certain exchange rate today, and when ZXY needs to purchase materials in six months, it will not be affected by adverse changes in the exchange rate.

An outright rate differs from the rate used in the spot market because the parties factor in characteristics such as the volatility of the currencies and their mutual opinion of where they think the exchange rate will be in the future. The disadvantage of using a forward outright is seen when the exchange rate moves in what would have been a favorable direction had the hedge not been implemented. Because the investor agreed to pay a predetermined exchange rate - regardless of what the rate ends up being when the investor makes the purchase - the investor doesn't stand to gain from favorable changes in the exchange rate.

To learn more, see A Primer On The Forex Market, Getting Started In Forex and Common Questions About Currency Trading.

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