Exchange Rate FAQs

How does a forward contract work?

A forward contract or alternatively a ‘forward’ is a contract between two parties for the purchase or sale of an asset or product at a future date, decided upon today. The price agreed upon is called a delivery price which is equal to the forward price agreed upon when the contract is signed. The party agreeing to buy the product in the future assumes a long position and the seller a short position.

No cash or assets are exchanged before the agreed upon date. Because of this the real time value of the goods in question may rise and fall creating the chance that either the buyer or seller will make a profit or a loss from the deal depending on the markets. These contracts are used often for currency exchange as currency prices change on a daily basis so it is hard to predict.