Forward exchange contract
What does a forward exchange contract fix?
ONE OF 80 TERMS · FREE · NO SIGNUP
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A forward exchange contract is an agreement to exchange one currency for another on a future date at a rate set today. For an exporter invoicing in a foreign currency, selling the expected receipt forward fixes the amount of home currency it will get whatever the spot rate does in the meantime; it removes the gain as well as the loss. The rate is not a forecast: it is the spot rate adjusted for the interest rate difference between the two currencies over the period. A forward hedges a transaction that will happen; one written against a receipt that never arrives becomes a position of its own.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
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