Forward Discount

AAA

DEFINITION of 'Forward Discount'

In a foreign exchange situation where the domestic current spot exchange rate is trading at a higher level then the current domestic futures spot rate for a maturity period. A forward discount is an indication by the market that the current domestic exchange rate is going to depreciate in value against another currency.

INVESTOPEDIA EXPLAINS 'Forward Discount'

A forward discount means the market expects the domestic currency to depreciate against another currency, but that is not to say that will happen. Although the forward expectation's theory of exchange rates states this is the case, the theory does not always hold.

RELATED TERMS
  1. Currency Forward

    A binding contract in the foreign exchange market that locks ...
  2. Currency Futures

    A transferable futures contract that specifies the price at which ...
  3. Spot Exchange Rate

    The rate of a foreign-exchange contract for immediate delivery. ...
  4. Currency

    A generally accepted form of money, including coins and paper ...
  5. Forward Premium

    When dealing with foreign exchange (FX), a situation where the ...
  6. Forex - FX

    The market in which currencies are traded. The forex market is ...
RELATED FAQS
  1. What is the difference between forward and futures contracts?

    Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell ... Read Full Answer >>
  2. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  3. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  4. How are commodity spot prices different than futures prices?

    Commodity spot prices and futures prices are different quotes for different types of contracts. The spot price is the current ... Read Full Answer >>
  5. How do commodity spot prices indicate future price movements?

    Commodity spot prices indicate future price movements because commodity futures prices are calculated using spot prices. ... Read Full Answer >>
  6. Where did market to market (MTM) accounting come from?

    Mark to market accounting has been around in concept since the stock market began; however, it was not officially part of ... Read Full Answer >>
Related Articles
  1. Options & Futures

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  2. Retirement

    The Money Market

    If your investments in the stock market are keeping you from sleeping at night, it's time to learn about the safer alternatives in the money market.
  3. Forex Education

    Forex Tutorial: The Forex Market

    In this online tutorial, beginners and experts alike can learn the ins and outs of the retail forex market.
  4. Stock Analysis

    Southwest & Cheap Oil: The Perfect Combination?

    Discover how falling oil prices (and well-timed futures contracts) benefit Southwest Airlines.
  5. Economics

    As Fed Prepares To Move, Gold Is Losing Its Luster

    Last week’s Semi-Annual Monetary Policy Report to Congress returned investors’ focus back to the fundamentals, and a general upbeat of the economy.
  6. Investing Basics

    How Does Delta Hedging Work?

    Delta hedging is a derivative trading strategy that attempts to reduce -- or eliminate -- the risk caused by price changes in the underlying asset.
  7. Options & Futures

    Interpreting Overnight Action In The Index Futures

    Overnight action in index futures sets the tone for the U.S. market day. Traders can use 24-hour index futures charts to predict action in the coming day.
  8. Investing Basics

    What Does Spot Price Mean?

    Spot price is the current price at which a security may be bought or sold.
  9. Investing Basics

    What Does a Clearing House Do?

    A clearing house is a third-party agency or separate entity that acts as a go-between for buyers and sellers in financial markets.
  10. Investing Basics

    What is Meant by Implied Volatility?

    The estimated volatility of a security's price.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!