What is a Forward Contract in Forex?

A forex forward contract is a “private agreement” between two parties to exchange a specified amount of one currency for another at a predetermined exchange rate on a specified future date.

Unlike a spot transaction, where currencies are exchanged near the current market rate, a forward contract fixes the exchange rate today for a transaction that will occur later. For example:

• Suppose an Indian importer expects to pay USD 100,000 after three months. 
• Assume that the current USD/INR forward rate is ₹84.5.
• Now, the importer can enter into a forward contract to buy USD 100,000 at ₹84.50 after three months.
• In this case, the contracted rupee amount would be:
  • USD 100,000 × ₹84.50 = ₹84,50,000
• Later, even if USD/INR rises to ₹86 by the settlement date, the importer is protected from that increase. 
• Whereas, if it falls to ₹83, the importer still has to transact at the contracted rate of ₹84.50.

Forward vs Futures in Forex India

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