Why would financial institution do a forward transaction?

Answer 1

"Forwards" (as opposed to "spot" and "futures") are used to hedge the financial institution positions against risk.

Forwards are commonly used to hedge currency and interest rate risk.

Let's say you own a bank - let's call it Flameboy Savings & Loan (FBSL). FBSL takes deposits and in turn loans it out. It packages the loans to securitize them, sells them off to guys like FNMA. You make profits by making the net yield spread between the interest rate you loan out at and the interest you pay to depositors. Let's say you loan out $10,000 to somebody for a 5 year fixed balloon payment. Now let's say you want to lock in a profit margin, where FBSL agrees to sell a forward. The forward will be based on market rates at the time. Let's say you agree to pay a fixed rate, say 2%, at a set period of time in the future. Let's say that's 10 years. Now, assuming that nobody defaults, you have just locked in 3% profit margin that will settle in 10 years.

Let's say FBSL has a branch in Japan. Your Japan branch gets a deposit for a 118,000 Yen 1-year 2.0% CD. Your not going to find a way to loan out money at 1 year really easily. But you do have a US$10,000 loan in the US that is maturing in the one year at 7.0%. You can lock in the profit (the 2.0% you owe in one year minus the 7.0% you'll get in one year) if you can hedge away the currency risk. You can buy a forward for Japanese Yen of the same amount 118,000 Yen in 1 year that will hedge away your risk.

Answer 2

To use an example of a 'forward' transaction, a gold miner may go into the future's market to sell futures contracts on gold it has not yet mined if the price is viewed as high. By doing this it locks in the price of gold when it is high, then simply mines it and delivers it to the buyer.

Financial institutions may do this for many reasons, perhaps to guard against currency risks that assets are based in. Or, to have the right to delivery of something that currently has a low price. Futures markets are traded for everything from agricultural production, to metals, to energy, to currency, and everything in between.

Answer 3

I am not sure quite what you are asking, but I will try to help. I work at a bank and we do not typically forward transactions. We do place holds on certain transactions such as checks for large amounts or if your account is very overdrawn and is so repeatedly. This protects you and the bank if the deposited check bounces. If you do an ATM the bank may not process the transaction for several days and in effect the transaction is "forwarded". I suggest you talk to your bank to get a more accurate answer.