A forward contract (sometimes referred to as a FEC - Forward Exchange Contract) is a useful hedging product that is frequently used by all sizes of businesses to manage currency exposure risk.

The forward is an agreement to buy or sell an amount of currency by a set date in the future at rate agreed today. This works well in most cases, as costs can be fixed when buying from overseas and so cashflows and profits become more certain.

The downside is it is a contract and so there is also an obligation to use the contract up before the expiry date.

This can create an opportunity cost if the rate has moved favourably during this time but it can also turn into a real loss if the business requirement reduces and the forward contract is no longer needed.

Did this answer your question?