Definition – What does In the Forward mean?
A Forward, or Forward Contract, is a term describing a forex purchase contract for a pre-specified exchange rate that settles at some agreed future date, including an adjustment for the time cost of money based upon the interest rate differential between the two currencies involved.
The interest adjustment is sometimes called the forward premium or forward discount. This contract is in contrast to a “spot” contract, which is an agreement to buy or sell an asset today at today’s prevailing market price.
The forex trader that buys a “forward” is said to assume a long position in the currency purchased, while the Seller is said to assume a short position in the opposite currency in the pair.
The agreed price is commonly referred to as the Delivery Price. Forwards are typically used by corporate treasurers to hedge forex risk by fixing future exchange rates and limiting forex exposure.
Speculators or investors also use them to profit from the interest rate differential between countries in what is known as a “carry trade”.
A Forward is closely related to a futures contract, but futures contracts are actively traded on markets that re-value the instrument based on supply and demand forces.
The purchase of a Forward is a commitment that generally requires collateral or credit worthiness granted by a Seller to cover credit risk for the time period involved.