What does Forward Exchange Contract mean?
A forward contract where an investor agrees to exchange a specified quantity of one currency for another at a future date. The contract helps the buyer to protect himself from fluctuations in exchange prices. These contracts are generally entered into by importers and exporters. Investors also use forward exchange contractfor the purpose of speculation.
Futures Knowledge Explains Forward Exchange Contract
A forward exchange contract is useful more as a business tool rather than an investment. For example, a company XYZ buys equipment from a company in UK for which it needs to pay £200,000 in 3 months. To hedge its risk against unfavorable change in exchange rates, XYZ enters into a forward contract with its bank to buy £200,000 in 3 months at the current exchange rate. After 3 months, XYZ will not be affected by any change in exchange rate. A forward exchange contract takes care of the exchange risk.