Currency Forward Contracts Hedge Foreign Exchange Exposure

Currency forward or forward contract are two major tools in terms of currency hedging or to protect the foreign currency against exposure to foreign exchange market. Investopedia defines currency forward as : the contract holders are obligated to buy or sell the currency at a specified price, at a specified quantity and on a specified future date. These contracts cannot be transferred. As far as forward contract is concerned, it is a contract in the Forex market that locks in the price at which an entity can buy or sell a currency on a future date. Forward contract is also known as outright forward currency transaction, forward outright or FX forward.

Unlike, futures contract, which trade on an exchange, currency forward contract is made and terms and conditions are discussed between the parties. If you are a business irrespective of your size, you need to consider following reasons for currency hedging :  

• Any type of hedging will minimize the present loss if any. This will directly impact the profit gains scenario
• This saves you of the constant speculation of the foreign exchange rate
• Facilitates the pricing of products sold on export markets

The foreign future and currency forward contracts like any other such contracts are traded on highly regulated exchanges across the glob irrespective of the contract sizes, time periods, and settlement procedures. In contrast to future contracts, are over-the-counter contracts and may have of different contract sized, time periods and settlement procedures. Because they are considered over the counter contracts, there is no centralized or regulated trading location and transactions are conducted directly between parties via telephone and on-line trading platforms at many places across the glob. This type of currency hedging started growing popular in 1970s, and is mainly used by big corporations and banks to minimize their foreign exchange currency rate. However, independent and individual investors or traders can also take advantage of these currency forward contracts.