A:

The term outrights is used in the forex (FX) market to describe a type of transaction where 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 referred to as a forward outright, an FX forward or a currency forward. A forward outright transaction is mainly used by parties 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 its 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, the company could take advantage of a forward outright transaction, allowing the two parties to 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 that the exchange rate could move in what would have been a favorable direction had the hedge not been implemented. In this case, the investor doesn't stand to gain from favorable changes in the exchange rate because they agreed to pay a predetermined exchange rate irregardless of the rate when the investor makes the purchase.

For further reading, see "A Primer on the Forex Market," "Getting Started in Forex" and "Top 6 Questions About Currency Trading."

RELATED FAQS
  1. What does rollover mean in the context of the forex market?

    In the forex (FX) market, rollover is defined as the process of extending the settlement date of an open position by rolling ... Read Answer >>
  2. How do I convert a spot rate to a forward rate?

    The spot rate shows the cost of executing a financial transaction today, while the forward rate provides the cost of executing ... Read Answer >>
  3. Can I trade a currency when its main market is closed?

    In the forex market, currencies from all over the world can be traded at all times of the day. The forex market is very liquid, ... Read Answer >>
  4. How does the balance of payments impact currency exchange rates?

    Take a brief look at the relationship between a nation's balance of payments and the exchange rate value of its currency ... Read Answer >>
Related Articles
  1. Trading

    Forex trading: A beginner's guide

    Foreign exchange is the act of changing one country's currency into another country's currency for a variety of reasons, usually for tourism or commerce.
  2. Trading

    How To Lock In An Exchange Rate

    Currency risk can be effectively hedged by locking in an exchange rate through the use of currency futures, forwards, options, or exchange-traded funds.
  3. Trading

    How Equities Affect the FX Market

    By studying the stock market, it may be possible to predict the movement of foreign currency. Learn how it's done and the limitations of this approach.
  4. Trading

    Why It's Important To Regulate Foreign Exchange

    In an increasingly globalized economy, the significance of the foreign exchange marketplace cannot be underestimated.
  5. Trading

    Economic factors that affect the forex market

    Keep pace in the competitive and fast-moving foreign exchange (forex) markets by knowing the economic factors and indicators to watch.
  6. Trading

    Currency fluctuations: How they effect the economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. Read on for what effects these changes can have.
RELATED TERMS
  1. Forward Market

    A forward market is an over-the-counter marketplace that sets ...
  2. Outright Futures Position

    An outright futures position is an unhedged futures trade with ...
  3. Foreign Exchange

    Foreign exchange is the conversion of one currency into another ...
  4. Forex Hedge

    A forex hedge is a foreign currency trade that's sole purpose ...
  5. Forward Discount

    A forward discount occurs when the expected future price of a ...
  6. Forward Rate

    A forward rate is an interest rate applicable to a financial ...
Trading Center