Only a handful of brokers offer forward deals in their service and easyMarkets is one of them. Find out how it works in this article.
Derivatives are financial contracts arranged between two parties that derive their value from other financial entities, such as an underlying asset, a group of assets, or a benchmark. Some of the most common assets used for derivatives are stocks, currencies, commodities, bonds, interest rates, and market indexes. Traders typically use derivatives to access specific markets, hedge their risks, or maximize their returns.
There are several types of derivatives to choose from. One of them is called forward deals or forward contracts. This type of contract agreement is considered advanced trading, so it is usually reserved for institutional clients, banks, brokers, and corporations. However, this doesn't mean that it is completely unavailable for retail traders.
Contents
What is a Forward Deal?
Forward deal is a type of contract agreement between a buyer and a seller to trade an underlying asset at a certain price on a specified date in the future. Naturally, the buyer will take the long position whereas the seller will take the short one. The set price is called the forward price, which is calculated using the spot price and the risk-free rate. The former refers to the asset's current price, while the latter is the hypothetical rate of return of trade with zero-risk assumption.
Forwards are set over-the-counter (OTC), so they are not standardized or regulated by exchanges. This also means that forward deals are flexible. Traders can customize the deal according to their needs, such as the expiration date and the amount of assets involved in the transaction. However, note that the lack of regulation can also pose additional risks.
Furthermore, the idea of forward deals is that the parties involved in this contract can manage volatility by locking in the price for an underlying asset on a specified date. Traders can use this opportunity to cover or hedge their positions and minimize the risks of unpredictable exchange rate movements in the future. When the rate and date of the payment are agreed upon, the trader is said to have locked in the payment amount.
How It Works
To create a forward deal, a buyer and a seller must agree to the specifications of the contract. This includes the amount of assets, the price per unit, and the date on which the contract will take place. On the agreed date, the buyer must pay the seller the agreed price and receive a predetermined amount of assets in return. If the current market price is lower than the contract, the seller makes a profit. But if the current market price is higher than the contract, the buyer makes a profit.
The simplest way to demonstrate how forward deals work is through an example. Let's say that the current price of wheat per bushel is $10, but a farmer is concerned that the price of wheat will drop significantly in the coming months. In order to hedge the risk, the farmer makes a contract with a grocery that agrees to buy 1 million bushels of wheat at a price of $10 in three months.
On the date of the settlement, these scenarios could happen:
- The price is exactly as settled in the contract. The settlement goes through at the agreed price, so neither party gets a profit or loss.
- The price drops lower than the negotiated price. Let's say the price falls to $8 per bushel, and the settlement still has to go through at the agreed price. The buyer has to pay $10 for the commodity, while the seller takes profit from the hedge.
- The price rises above the negotiated price. The contract is settled at the negotiated price, so the buyer gets the profit.
Why Use Forward Deals
In the context of trading, forward deals are used for hedging reasons. It is an effective tool to protect your trade against unpredictable market changes and potential losses in the future. This system can be very useful, especially in markets that often see extreme volatility in prices and wide price swings. For instance, traders can use forward deals to anticipate huge price swings in currency exchange rates when making large cross-border purchases.
Forward deals are simple, fast, and highly customizable. You can enter a specific contract that fits exactly your expectations. If everything goes according to plan, you can take a good amount of profit without much hassle. With up to 30 days of maturation, this type of contract can certainly lower your stress of trying to analyze the market movements and protect your trade on the spot.
Apart from that, forward deals can also be used solely for speculative purposes. This option might be less popular than a futures contract, but it still serves the same purpose and is quite effective to hedge against volatility. If you believe that the future spot price of the asset will rise, then open a long forward position. If the future spot price really turns out to be higher than the agreed contract price, you will make a profit. On the opposite, if you enter a short forward position, you should expect the price to go lower than the current price.
Forward Deals Vs Futures Contracts
Both forward and futures contracts are derivatives, but they are not exactly the same. The first and most obvious difference is the way they are regulated. Forward deals are traded over the counter whereas future contracts are traded on an exchange. As a result, forward deals are unregulated and customized. Meanwhile, futures contracts are overseen by a central government and standardized.
Another key difference lies in the risk levels and guarantees. Futures contracts are managed by a clearing house, which is basically the middleman that provides the guarantee to settle the contract. The clearing house is responsible to make sure that the contract is settled appropriately. Some futures contracts even require a deposit or margin as collateral to anticipate the risk. Meanwhile, forward deals have no such thing, hence the risk is considered higher. One way to anticipate it is perhaps by building a premium into the forward deal to minimize the possibility of faulty.
Trading Forward Deals in easyMarkets
easyMarkets is one of the few brokers that offer forward deals for retail clients. Since 2001, the broker has been known to provide various innovative products for its clients, including exclusive risk management tools, derivative trading, freeze rate, and more. You can also find other benefits other than trading such as market analysis tools and trading courses.
Since 2001, easyMarkets have been writing their stories in financial markets. Simple, Honest, and Transparent, become three values that are carried on easyMarkets. The company has tried to make the process of trading as simple as possible.
They rebranded from easy-forex to easyMarkets in 2016. Over the years, easyMarkets expanded their CFD offerings to include global indices, options, metals, forex, commodities, and cryptocurrencies. The company is licensed by CySEC and ASIC.
Another privilege when trading in easyMarkets is its own platform. easyMarkets platform is simple and versatile. Based on reviews from traders, it's friendly to new clients and hosts a lot of features for experienced traders. Clients also receive free guaranteed stop loss, no slippage, fixed spreads, and no funding or withdrawal fees from easyMarkets.
There are three uniques features in the platform. Firstly, dealCancellation gives traders the ability to "undo" their trade. easyMarkets is the only broker that offers a way to close trade before it reaches 60 minutes duration only with a small fee.
Furthermore, traders can enjoy the Inside Viewer. This tool gives traders a deeper understanding of market sentiment by showing them percentage of buying and selling executed in the platform. The third unique feature is Freeze Rate. traders can pause a rate and place their trade at the "frozen" rate using this tool.
easyMarkets also includes financial calendar, market news, trading charts, and trading signals as the platform's perks. They also offer the technology on the mobile interface via iOS and Android devices. Traders can access markets anywhere and at any time.
MetaTrader 4 is also provided by easyMarkets. When using this popular trading platform, traders will get negative balance protection and fixed spreads. Besides that, Vanilla Options is available in this broker.
Because of those innovations, easyMarkets is an award-winning broker, receiving Forex Broker 2019 by The Forex Expo-Dubai, Most Innovative Broker 2018 by World Finance Markets Awards, Best APAC Region Broker 2018 by ADVFN International Financial Awards, Most Transparent Broker 2017 by Forex-Awards, Best Forex Service Provider 2017 by FXWord China, and many more over the years.
Moreover, easyMarkets offers three account types, such as VIP Accounts, Premium Accounts, and Standard Accounts. All of them can be accessed by the Web/App and MT4 platform. easyMarkets provide maximum leverage at 1:200 when using easyMarkets Web/App platform, and maximum leverage of 1:400 when using MT4.
Fixed spreads start from 1.0 pips in forex trading. Traders can become easyMarkets VIP clients with some benefits, such as trading via telephone, access to the tightest fixed spreads, personal analyst, and real-time market updates via SMS.
Traders do not need to pay additional fees whethere it is for commission, account fees, or deposit withdrawal. Account currencies are available in 18 options including EUR, CAD, CZK, JPY, NZD, USD, SGD, and many more. The company offers multiple ways to deposit and withdraw funds, some of them are credit/debit cards, bank transfers, and a ion of eWallets like Neteller, Skrill, and Fasapay.
For any questions or assistance, traders can contact the company directly at one of their local offices or at their headquarters in the Marshall Islands. Besides, traders can chat with their customer service by email, Facebook, WhatsApp, Viber, and Live Chat.
Based on the review above, easyMarkets provides easy-to-use platforms with some unique tools and it can be accessed by traders anytime and anywhere. Besides, traders do not need to pay extra fees for trading commission and deposit/withdrawal fees. Traders who register in easyMarkets can enjoy low spreads in EUR/USD pairs from 0.9 in the MT4 platform.
In terms of forward trading, easyMarkets helps you protect your trade and hedge your positions against future price changes. All you need to do is create an easyMarkets trading account and follow the steps below:
1. Go to the broker's website and log in to your account. In the trading ticket of your easyMarkets platform, choose "Forward".
2. Choose your market from the available list. Note that not all assets might be offered under forward deals. If you make your decision from the Market Explorer, you can easily see which ones are available to trade as a forward deal.
3. Specify the amount of the trade and how much you are willing to risk in the contract. Then, set the future expiration date of the settlement.
4. Click the "SELL" or "BUY" button to create an agreement.
5. The stop loss is set automatically, but you have the option to modify it as well as the take profit level from the Forward Deal section below the trading area, or you can just click "My Open Trades" on the menu. You can also modify your amount of risk and your easyMarkets account will be credited or debited accordingly. Once you're satisfied, click "Accept".
End Thoughts
Derivatives like forward contracts can be an effective tool to maximize your returns, protect your positions against falling prices in the future, and diversify your portfolio with assets like commodities. Whether you're a buyer or a seller, the goal is to hedge against price uncertainty and lock in the future price of an underlying asset.
If you are interested in trading forward deals, easyMarkets is the way to go. You can find everything you need to trade forward deals with a low-cost and intuitive platform.
More on easyMarkets:
However, it is worth mentioning that forward deals are highly speculative because there is no way of predicting future price changes with absolute accuracy. Therefore, it is more recommended to large or experienced traders with a good understanding of derivative trading and a good risk management system.
easyMarkets was founded back in 2001 when the only way to trade was through a physical trading room. Since then, the broker's purpose was to give market access to anyone that wanted it. They ended up fundamentally changing the online trading industry in several aspects with their "simply honest" basic philosophy and business model.
5 Comments
Apr 30 2023
While I agree with the author that the Fordward Deals offered by easymarket are more likely speculative since they involve predicting the future price level, as well as the SL and TP, which we cannot be certain of, I also think that predicting the future of the market is possible, as many traders do so through methods such as swing trading, where positions are held for days and weeks. The difference with Fordward Deals is that positions are opened after several days, which raises the question of what technical tools can be used to avoid speculative moves when using this feature.
Apr 30 2023
To avoid speculative moves when using the Forward Deals feature offered by easymarket, you could consider using technical analysis tools to help identify potential market trends and make informed trading decisions. Some common technical analysis tools include moving averages, trend lines, and momentum indicators. Additionally, it's important to have a well-defined trading strategy and risk management plan in place to help mitigate potential losses. By combining technical analysis with a solid trading plan, you may be able to use the Forward Deals feature in a more strategic and less speculative manner. And of course this features seem like to the experienced one and for beginner, this feature little bit complicated and it is better for them to do the trade normally without this feature.
Apr 30 2023
I agree!! Using Forward Deals requires good management skills, as with any type of trading. It's important to have a clear understanding of your trading strategy, risk management, and the technical analysis tools you are using to make trading decisions. With those thing, you can clear the speculative move as well. And additionally, it's important to stay up-to-date on market news and events that may impact the market and adjust your trading strategy accordingly. As with any type of trading, there are risks involved, and it's important to carefully consider those risks and manage them effectively.
Apr 30 2023
In the end, the author suggest to hedge using forward deals because it really can help you to do diversify your assets but I am curious and want to ask about the potential risks associated with using derivatives like forward contracts to hedge against price uncertainty, and how can these risks be mitigated to ensure that investors are able to effectively manage their portfolios and lock in future asset prices, given factors such as market volatility, changing interest rates, geopolitical events, and other economic and political conditions that may impact the value of the underlying asset?
Apr 30 2023
There are a few potential risks you should watch out for when using derivatives like forward contracts to hedge against price uncertainty. The first is counterparty risk, which is when the other party to the contract doesn't hold up their end of the deal. This can happen if they can't deliver the underlying asset or if they don't pay you what you're owed. Another risk is market risk, which is when the value of the underlying asset changes unexpectedly, like if there's a lot of volatility in the market or if interest rates change. And then there's liquidity risk, which is when you can't sell the underlying asset or close out the contract when you need to because there aren't enough buyers or sellers around.
To avoid these risks, there are a few things you can do. First, try to diversify your portfolio so you're not too dependent on any one asset. You can also do some research on potential counterparties to make sure they're financially stable and reliable. It's a good idea to use standardized contracts and work with reputable brokers and exchanges to reduce the chances of something going wrong. Finally, keep an eye on market conditions and adjust the terms of the contract if you need to. By taking these steps, you can help make sure that you're able to effectively manage your portfolio and lock in future asset prices while minimizing risks.