In plain English
What Forward contract means
In foreign exchange, a forward contract locks in an exchange rate for settlement later. The contract is customized between counterparties, so the amount, maturity, and settlement terms can be tailored. Unlike an exchange-traded future, a forward is typically over the counter.
Why it matters
Forwards are used to manage currency risk when a future payment or receipt is known. They can help a business or investor reduce uncertainty about the exchange rate at settlement, though they also remove the chance to benefit from favorable currency moves.
Example
A company expects to pay EUR 1 million in three months. It enters a forward to buy euros at a fixed dollar rate on the settlement date. If the market rate changes before then, the contract still settles at the agreed rate. Simplified example.
Quick answers
Common questions
Is a forward contract standardized?+
Usually no. Forwards are commonly customized between the parties, unlike many exchange-traded contracts.
Does a forward require delivery?+
Not always. Some forwards are settled by net cash payment rather than physical delivery, depending on the contract.
Sources