Business Glossary

agreement to exchange at a given future date currencies of different countries at a specified rate (forward rate). A forward contract is a foreign currency transaction . The gain or loss on the contract is typically included in determining net income. The amount of gain or loss, except on a speculative forward contract (designed as a risky investment rather than as a hedge), is computed by multiplying the foreign currency amount of the forward contract by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the contract.

agreement between two parties to exchange one currency for another at a forward or future date. Forward contracts call for delivery on a date beyond the spot contract settlement, which ordinarily takes place within ten days of the transaction date. Unlike a futures contract, forward contracts do not take place on regulated exchanges and do not involve delivery of standard currency amounts. They are cancelable only with consent of the other party to a trade. A forward contract allows a bank, or a bank's customer, to arrange for delivery (or sale) of a specific amount of currency on a specified future date, at the current market price. This protects the buyer against the risk of fluctuating rates when acquiring foreign exchange needed to meet future obligations.