What is a currency forward?

What is a currency forward?

Forward contracts allow an investment institution, bank, or individual investor to lock in a price for a good or service by agreeing to exchange a set amount of one currency for a set amount of another at the settlement date of a contract.

Forward contracts may be used as the means of establishing a settlement price for goods or services that have been exchanged or will be exchanged in the future.

They may also be used as stand-alone contracts that serve as hedging tools for large institutions who have obligations in a given currency that will be due in the future.

The exporter/ seller in a deal where a forward contract is used may be bearing all of the risk that exchange rates will change by the time of settlement.

Unlike futures contracts, which are exchange-traded, standardized, and more regulated, forward contracts are over-the-counter instruments which give the counter-parties some autonomy and flexibility when establishing the terms of the deal.

Some forward contracts do have an interest rate tied to an agreed-upon benchmark, such as LIBOR.