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Forward Contract: Cons Currency fluctuates in both directions; a forward contract protects your business if the value of the dollar goes down, but there is the possibility that it could also go up. If the dollar rises, you may be locked into a lower rate than the market rate.

A currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date. A currency forward is essentially a customizable hedging tool that does not involve an upfront margin payment.

The forward contract definition in financial investing is an agreement that an investor will purchase an asset at a set price on a specific future date. Forward contracts can also be shortened to just "forwards" and are often known as a "pay now, buy later" agreement.

Example of How a Forward Contract Works The business meets with the supplier, and agrees to pay USD $500,000 in 3 months from now. The current GBP / USD exchange rate at the time of the deal is GBP £1.00 = USD $1.32. ABC Factory therefore expects to pay GBP £378,788 for the equipment.

This happens four times a year for most FX futures contracts (March, June, September, and December).

Example of a Forex Hedge For example, if a U.S. investment bank was scheduled to repatriate some profits earned in Europe it could hedge some of the expected profits through an option. Because the scheduled transaction would be to sell euro and buy U.S. dollars, the investment bank would buy a put option to sell euro.

If a speculator believes that the future spot price of an asset will be higher than the forward price today, they may enter into a long forward position. If the future spot price is greater than the agreed-upon contract price, they will profit.

Forward Contract: Cons Currency fluctuates in both directions; a forward contract protects your business if the value of the dollar goes down, but there is the possibility that it could also go up. If the dollar rises, you may be locked into a lower rate than the market rate.

A currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date. A currency forward is essentially a customizable hedging tool that does not involve an upfront margin payment.

The forward contract definition in financial investing is an agreement that an investor will purchase an asset at a set price on a specific future date. Forward contracts can also be shortened to just "forwards" and are often known as a "pay now, buy later" agreement.

Example of How a Forward Contract Works The business meets with the supplier, and agrees to pay USD $500,000 in 3 months from now. The current GBP / USD exchange rate at the time of the deal is GBP £1.00 = USD $1.32. ABC Factory therefore expects to pay GBP £378,788 for the equipment.

This happens four times a year for most FX futures contracts (March, June, September, and December).

Example of a Forex Hedge For example, if a U.S. investment bank was scheduled to repatriate some profits earned in Europe it could hedge some of the expected profits through an option. Because the scheduled transaction would be to sell euro and buy U.S. dollars, the investment bank would buy a put option to sell euro.

If a speculator believes that the future spot price of an asset will be higher than the forward price today, they may enter into a long forward position. If the future spot price is greater than the agreed-upon contract price, they will profit.