In plain English
What FX forward means
An FX forward is a type of forward contract whose underlying transaction is a currency exchange. The parties agree on the two currencies, notional amounts, settlement date, and forward rate. In a deliverable FX forward, each party delivers its currency at settlement. A non-deliverable forward instead normally settles the gain or loss in an agreed settlement currency without delivering the restricted currency.
Why it matters
FX forwards are commonly used to manage a known future foreign-currency payment or receipt. They replace uncertainty about the future spot rate with a contractual rate, but they do not eliminate credit, settlement, operational, or opportunity-cost risk. The forward rate is not simply a forecast; it is a tradable contractual price influenced by spot rates, interest-rate differentials, and market conditions.
Example
A U.S. company expects to receive £500,000 in three months and agrees to sell those pounds forward at $1.25 per pound. At settlement, it delivers £500,000 and receives $625,000 under a deliverable contract. If spot is then $1.20 or $1.30, the contractual dollar amount remains $625,000, assuming both parties perform.
Quick answers
Common questions
How is an FX forward rate determined?+
The rate reflects the current spot rate and the relative interest rates of the two currencies for the contract period, alongside market conventions and credit or funding considerations. It is a contract price, not a certain prediction of future spot.
What is a non-deliverable FX forward?+
A non-deliverable forward, or NDF, is an FX forward that generally settles the difference between the agreed forward rate and a reference spot rate in a convertible settlement currency, rather than delivering both currencies.
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