Currency Forward
An over-the-counter contract to exchange a set amount of one currency for another at a fixed rate on a specified future date.
What is Currency Forward?
A currency forward is a privately negotiated, over-the-counter agreement between two parties to exchange a specified amount of one currency for another at a predetermined exchange rate (the forward rate) on a set future date. Unlike futures contracts, currency forwards are not traded on exchanges and have no standardized contract sizes or settlement procedures — terms are fully customizable. The forward rate is derived from the spot exchange rate adjusted for interest rate differentials between the two countries (covered interest rate parity). Importers, exporters, and multinationals use currency forwards to lock in exchange rates and eliminate FX uncertainty on future receivables or payables.
Example
A U.S. exporter expects to receive €5 million from a European customer in 90 days. To eliminate euro-to-dollar exchange rate risk, the exporter enters into a currency forward with a bank to sell €5 million at a rate of 1.08 USD/EUR in 90 days, locking in $5.4 million regardless of where the spot rate moves. If the euro falls to 1.04, the forward saves the exporter $200,000.