A forward exchange contract is a special type of foreign currency transaction. Forward contracts are agreements between two parties to exchange two designated currencies at a specific time in the future.
These contracts always take place on a date after the date that the spot contract settles and are used to protect the buyer from fluctuations in currency prices. They cannot be canceled except by the mutual agreement of both parties involved. The parties involved in the contract are generally interested in hedging a foreign exchange position or taking a speculative position. The contract's rate of exchange is fixed and specified for a specific date in the future and allows the parties involved to better budget for future financial projects and known in advance precisely what their income or costs from the transaction will be at the specified future date.
The nature of forward exchange contracts protects both parties from unexpected or adverse movements in the currencies' future spot rates. Generally, forward exchange rates for most currency pairs can be obtained for up to 12 months in the future.
There are four pairs of currencies known as the "major pairs. For these four pairs, exchange rates for time period of up to 10 years can be obtained. Contract times as short as a few days are also available from many providers. For example, assume that the U.
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Calculation Example The forward exchange rate for a contract can be calculated using four variables: Get Free Newsletters Newsletters.More...