Essentially, a currency forward is a tailored, documented contract between two parties that specifies a fixed exchange rate for future transactions in foreign currencies. Often, the date on which the currency conversion rate is set coincides with the date on which the parties intend to complete the product sale.

A currency forward is a customized financial contract between two parties to exchange a specific amount of one currency for another at a predetermined exchange rate on a future date. Unlike standardized futures contracts, forwards are traded over-the-counter (OTC) and can be tailored to the needs of the parties involved.

Businesses and investors use currency forwards to hedge against exchange rate fluctuations, reducing the risk of adverse currency movements. For example, an importer expecting to pay a foreign supplier in three months can lock in today’s rate to avoid potential losses if the domestic currency weakens.

While forwards provide certainty, they also carry counterparty risk, as a clearinghouse does not guarantee them. They are binding agreements, and early termination may incur costs.