What is a forward exchange contract?

A forward exchange contract is an agreement under which a business agrees to buy a certain amount of foreign currency on a specific future date. The purchase is made at a predetermined exchange rate. By entering into this contract, the buyer can protect itself from subsequent fluctuations in a foreign currency's exchange rate.

What does a foreign exchange exchange contract entail?

The parties involved in the contract are generally interested in hedging a foreign exchange position or taking a speculative position. All FECs set out the currency pair, notional amount, settlement date, and delivery rate, and also stipulate that the prevailing spot rate on the fixing date be used to conclude the transaction.

Can a foreign exchange forward be used as a hedge?

Alternatively, a separate forward contract could be used to hedge against changes in the exchange rate. For example, if your business is paying for goods in British Pounds, but the payment is only due in 3 months time, you could hedge the next payment with the help of a foreign exchange forward.

What is the difference between a forward contract and a future?

Forward contracts are private and customized contracts between two parties. They can only be settled on the date specified in the contract. Futures, on the other hand, are standardized contracts that are usually tradable. They can typically be traded on an exchange and settled any time before expiration.