Do forwards on currencies impact the spot market?

CFA Level II Derivatives
#1

Hello,

I was reading an article on Bloomberg where they said that Saudi Arabia decided to ban forwards on its currency because people use it to bet against it. Just so you know the Saudi Ryial is pegged to the USD and people are betting that the Central bank wont be able to maintain the peg and that the currency will depreciate vs USD.

My question is: how is banning forwards on SAR going to change anything to the situation? How are forwards influencing spot rate? I fail to understand the rational for this decision.

Here is the article: http://www.bloomberg.com/news/articles/2016-06-03/saudi-said-to-ban-currency-products-after-probe-into-peg-bets

Thank you

#2

If the forward price on the SAR vis-à-vis the USD is too low, arbitrageurs will borrow SAR, convert them to USD at the spot rate, invest USD risk-free, enter into the forward contract, and make a risk-free profit on the SAR.

All of the conversion of SAR to USD at the spot rate will drive the USD/SAR spot rate down.

Basic supply and demand.