Currency Forward

What are currency forwards?

Foreign exchange (FX) forward is a derivative contract that involves the exchange of two different currencies on a specific future date at a fixed rate.

The fixed rate is agreed at the inception of the contract.

 

What is a forward contract?

A forward contract is a bespoke bilateral contracts between two parties to buy or sell a underlying asset (such as currency) at a specified price and at a later date.

Forward contracts are fully flexible in terms of notional amounts and maturities, although one-month or three-month forwards are most commonly used for hedging purposes due to better liquidity and lower transaction costs.

 

How to hedge currency risk with forward contracts example

• A UK business sells £100,00 worth of products to a client based in the United States.
• They will receive payment in two months, however during this time they expect the USD to rise against GBP.
• The business therefore enters into a forward contract to lock in the current exchange rate and settle in two months time.

 

Related terms:

• FX Futures
• FX options
• FX Risk Management
• Currency Hedging