Forward
A contract to exchange currencies at a pre-agreed rate on a specific future date, used to hedge against currency risk.
A forward is an agreement to exchange currency at a set rate on a future date, settling weeks, months or years ahead. Businesses use them to lock in rates and remove uncertainty.
A forward contract is an agreement between two parties to exchange a specified amount of currency at a predetermined rate on a set future date. Unlike spot transactions that settle in two business days, forwards can settle weeks, months, or years ahead. Businesses use forwards to lock in exchange rates for future payments, eliminating uncertainty.
How It Works
- Two parties agree on the currency pair, amount, exchange rate, and settlement date
- The forward rate = spot rate plus or minus forward points (interest rate differential)
- If the higher-yielding currency is the base, forward points are subtracted (discount)
- On settlement, currencies are exchanged at the agreed rate regardless of current spot rate
Trading Tips
Forward rates are not predictions of future spot rates. They simply reflect interest rate differentials.
Businesses should use forwards to lock in rates for known future payments rather than speculating
Non-deliverable forwards (NDFs) settle in cash and are used for restricted currencies like CNY or INR
Forward Example
Say a UK importer must pay $1 million in 90 days and spot sits at 1.27. They lock 1.2720 forward today. Sterling can crash or soar for three months. Their cost stays fixed to the penny.
How Traders Use Forward
Use forwards to kill currency risk on known future payments, full stop. Compare two banks, match the date exactly, and never read the forward rate as a forecast of where spot is going.
Related Terms
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