The Forward Foreign Exchange MarketThe Reason for the MarketThe forward foreign exchange market allows interested parties to trade currency futures (Madura, 2006, p117). Futures contracts are an agreement between a company and a commercial bank to exchange a specified amount of currency, at a specified exchange rate, and on a specified date. Futures contracts are used around the world to mitigate the risk of sharp fluctuations in exchange rates in everyday business transactions. Companies use forward contracts when they know they will need a certain amount of foreign currency at a specified future date, this allows them to lock in a future exchange rate (Wikipedia, 2006). There may also be credit risk associated with foreign exchange because a "buyer" is essentially promising to purchase the currency at a future date. The buyer may not be able to complete the transaction simply because funds are not available at that time. So, in cases where a commercial bank does not know a business well and to protect itself against credit risk, it requires some form of security (such as a mortgage or deposit). Air Rarotonga is a great example of where and how futures are used regularly. This airline operates to and from countries and small islands in the Pacific. Air Rarotonga conducts its business relationships in New Zealand dollars, meaning it sells its airline tickets, pays its salaries and manages its daily business transactions in New Zealand dollars. Like many airlines around the world, they have to pay for their aviation fuel in US dollars, exposing them to foreign exchange risk between their New Zealand dollar revenue streams (from middle of paper..... .exchange XML Data. Retrieved April 21, 2006 from: http://www.ny.frb.org/xml/fx.htmlThe Federal Reserve Board (2005) The Global Saving Glut and the US Current Account Deficit, retrieved April 20, 2006. , from: http://www.federalreserve.gov/boarddocs/speeches/2005/20050414/default.htmUSA Today.com (2005) Feedback on improving relations between the United States and Europe Retrieved on 23. April 2006 from: http://www.usatoday.com/news/washington/2005-04-05-us-europe_x.htmVOA News (2005) Survey: Negative views of the United States and Bush still prevail in Europe. Retrieved April 23, 2006 from: http://www.voanews.com/english/archive/2005-07/2005-07-28-voa65.cfmWikipedia (2006) Forward Rate Contract Retrieved April 19, 2006 from: http ://en.wikipedia.org/wiki/Forward_rate_agreementWikipedia (2006) Speculation. Retrieved April 20, 2006 from: http://en.wikipedia.org/wiki/Speculation