A tale of two trading places7 min read . Updated: 17 Feb 2015, 07:26 PM IST
More restricted onshore markets become, more will be the migration of price discovery to offshore markets
Exposure to foreign exchange rate risk is often hedged with forward foreign exchange or FX contracts which fix an exchange rate now for settlement at a future date. The parties to a FX contract agree to buy or sell a currency at a specified exchange rate, at a specified quantity and on a specified date in the future. On that the two parties exchange the currency amounts, to settle their claims under the contract. In some countries monetary authorities impose restrictions on their currency’s convertibility in order to regulate the currency’s inflows and outflows. This creates difficulties for offshore parties in hedging their exposure with onshore forward contracts. This has led to the development of markets that overcome this issue. These are markets for non-deliverable forward contracts which do not require the exchange of the non-convertible currency.