What is forward contract in forex?
Forward forex contract is often used in the trading of forex, and it is also helpful for most of the traders. In forex, it is actually a way to enable a seller to lock a buyer into selling price for an asset with the transaction set in the future.
Forward forex contract also trusts on both, the buyer and the seller agreed on a fixed price. The fixed might be influenced by additional factors depending on what is being traded along with the date of settlement.
Some useful facts regarding forex forward contracts
- Forward contracts are the settlement between both the parties, i.e., the buyer and the seller in order to designate currencies within a specific time frame in the future.
- Forward contract are also used in the forex trading when any investor has an obligation either to take or make the payment of foreign currency at any given point in future.
- Through locking into forward contract to sell a currency, the seller also set a future exchange rate that too with no upfront cost.
- Forward contracts in forex are considered as the simple and best solution against the currency fluctuations.
- In addition, these contracts also offer SMEs the prospect to trade in foreign markets with ease.
Let’s take an example in order to get a deep insight about forex forwards contracts:
For an instance, A is an African importer, and A has to pay almost €109,735.03 to a Brazilian exporter B on dated October 15, 2014. Now A got a forward contract to purchase €109,735.03 at $1.11 rate of dollar-euro exchange rates on October 15, 2014.
So, here, A i.e., African importer is contractually indebted to purchase €109,735.033 on October 15, 2014, and on this particular date, A will reimburse $120,708.54 to B for it €109,735.03 x 1.11 equals to $120,708.53.
Who can use forward forex contracts?
Forward contracts are having some sort of characteristics and features that allow it to work well for most of the firms associated with the business of export and import as they mainly deals with any certain volume of account receivables or payables in overseas exchange.
What are the characteristics of forward contracts in forex?
Forward contract in forex have certain characteristics, and they are:
- The most important characteristic of forward contract is that it is not standardized which means that the traders can get forex forwards contracts for any given amount of money.
- Another important characteristic of forward contract is that it is provided by commercial banks.
- They are not tradable.
- Last but not the least, forward contracts in forex infer a compulsion in order to buy or sell currency at the quantified rate of exchange in quantified amount of time as specified in the contract.
Key points related to forex forward contracts
- It is mainly used by the big businesses and banks in order to manage the foreign exchange risk.
- It was initiated in late 70’s when the government relaxed its control over currencies.
- In addition, it also helps traders to set their future exchange rate.