What do forward transactions allow in currency trading?

Forward transactions in currency trading are designed to set a future exchange rate for a transaction that will occur at a later date. This means that traders can lock in an exchange rate today for a currency transaction that will take place in the future, which helps them manage the risks associated with fluctuating exchange rates.

This is particularly valuable for businesses that need to make payments in foreign currencies or for investors who are looking to hedge against potential losses from currency fluctuations. By agreeing on an exchange rate now, they can protect themselves from the possibility of an unfavorable rate change in the future.

In contrast, immediate exchange of currencies pertains to spot transactions, where the currencies are exchanged at the current market rate. The purchase of stock in currency markets is not directly related to forward transactions, as forward contracts deal with currency exchange rather than equity investment. Currency investments across global markets refers to trading activities rather than the specific mechanism of setting future rates, which is the primary focus of forward transactions.