Forward contract definition
A forward contract is a non-standardized type of derivative instrument. It’s an agreement between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of the contract’s conclusion.
It differs from a futures contract, which is an agreement between parties to buy or sell the underlying financial asset at a specific rate and time in the future.
The party who agrees to buy the underlying asset at a future date assumes the long position, and the party deciding to sell the asset takes a short position. The price agreed is the delivery price, equal to the forward price when the contract is agreed.
What is a currency forward contract?
A currency forward contract is an agreement between two parties to exchange currency for another currency at an exchange rate that has been fixed and on a specific future date. Using a currency forward contract allows both parties to lock in the exchange rate for a future transaction.
A currency forward is a hedging mechanism that does not involve an upfront margin payment. Currency forwards are not standardized, and they can be for a set amount of money, for any maturity date and delivery period, unlike exchange-traded currency futures.