Forward Deals or Contracts

Today’s exchange rate reserved for the future.

A forward deal is an agreement to exchange currencies on a future date at the exchange exchange rate agreed upon in advance. For example, if you are happy with the exchange rate today, and you would like to exchange a certain amount of funds at this exchange rate in one month, we can enter a forward deal. If you use the forward deals correctly, you will not have to worry about adverse changes in the foreign exchange market.

Example 1:

You are selling a product, you will receive payment in a foreign currency in one month, but you do not know what the exchange rate will be in one month. How will you price your product?
Solution: Simply calculate the price based on today’s rate and enter a forward deal. That will lock in today’s price until the date when you will conduct your transaction.

Example 2:

You are buying a product in a foreign currency in one month, but you do not know what the exchange rate will be in one month. If the exchange rate were the same as it is today, you would be fine.
Solution: Simply enter a forward deal. That will lock in today’s value for the date you are ready.

Two Types of Forward Deals:

Fixed Term Forward Deal
A fixed term forward contract matures on a specific date in the future and the currencies must be exchanged on that date.
Option Dated Forward Deal
An option dated forward deal is also called a forward window contract. This type of forward deal allows you to exchange currencies on any date in a range of dates, usually about a month long. This range of dates is called the window.
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