Codifyit Financial Products in 5 Minutes Module 04 of 09
Module 04 · Financial Products in 5 Minutes

FX Forward

Rate locked now, money moves later

Same trade as a spot — except you agree the rate today and don't actually exchange the money until a set date months from now.

$ € AGREE TODAY — SELL $1,000,000 IN 6 MONTHS BUY €930,000 IN 6 MONTHS (FWD RATE 0.9300) YOU SELLING DOLLARS YOUR BANK SELLING EUROS FORWARD 0.9300 ≠ SPOT 0.9200 the gap is just the two currencies' interest rate difference — not a guess about the future rate's locked now, cash moves later
An FX forward: the same trade as spot, but the rate is fixed today for a real exchange of money that only happens on the agreed future date.
1

What it actually is

An FX forward locks in an exchange rate today for a trade that settles on a future date — commonly anywhere from a week to a year out.

The forward rate isn't a guess about where spot will be; it's mechanically derived from today's spot rate plus the interest rate gap between the two currencies.

2

Why someone would do this

A company with a euro invoice due in six months doesn't want its dollar cost swinging around with the exchange rate between now and then.

A forward locks the rate today, so budgeting for it becomes a known number rather than a bet.

3

Who's actually doing this

Corporate treasurers hedging future receivables and payables are the classic users, alongside anyone with a known future FX cashflow.

Asset managers hedge a foreign bond position this way; exporters price a contract months in advance using the same trade.

Settlement: on the agreed future date Rate: locked today (spot + rate gap) No cash moves until settlement Used to hedge a known future FX flow