Forward (outright forward)
An importer must pay EUR 100,000 in three months and contracts to buy it at EUR/USD 1.1020. The agreed USD payment is USD 110,200. Later spot at 1.1500 or 1.0500 does not cancel that obligation; the contract fixes this payment, before fees and subject to its terms.
Price for a date, not a prediction
The outright forward rate includes the spot reference and points for the agreed maturity. A simple covered-interest model links the two currencies’ funding rates; actual quotes also reflect curves, basis, credit and costs. A higher forward rate than spot is not itself a forecast that the base currency will strengthen.
Delivery and cash settlement
A deliverable forward exchanges the contracted currency amounts. A non-deliverable forward settles a calculated difference under a specified fixing and settlement currency. Cancellation or early closeout is not automatically free: the replacement value can be positive or negative, and collateral or credit arrangements may apply.
Match the exposure being hedged
Specify amount, currency and payment date. If an invoice changes or is cancelled, an unchanged hedge can leave a new exposure. Compare the business cash flow with the hedge together; a loss on the hedge alone can accompany a successful reduction in payment uncertainty. Review counterparty and settlement risk, including the method of exchanging the two currencies.
FAQ
Does a forward work like buying an option?
No. A forward generally creates agreed obligations; an option gives its holder a defined right under the option terms.
Can a hedging forward have a negative mark-to-market value?
Yes. A hedge need not profit by itself. Evaluate its value and obligations alongside the underlying cash flow.
