Foreign exchange forward contract
From ACT Wiki
A transaction which solely involves the exchange of two different currencies:
- on a specific future date
- at a fixed foreign exchange rate which is pre-agreed at the outset of the contract.
Foreign exchange forward contracts are used - among other purposes - for hedging forward foreign exchange exposures.
For example known or likely future currency receivables and payables.
They are priced by adjusting the spot foreign exchange rate to reflect the interest rate differential between the two currencies involved for the forward period.
Both of the parties to the forward contract are committed to the exchange.
A forward contract differs in this respect from an option. In an option contract, only the option writer is committed.
Also known as a Forward foreign exchange contract, or a Foreign exchange forward.
