A currency forward, also known as a forward contract, is an agreement that allows the buyer to lock in an exchange rate the day on which the agreement is signed for a transaction that will be completed later. Forward contracts are one of the main methods used to hedge against exchange rate volatility, as they avoid the impact of currency fluctuation over the period covered by the contract.
Currency forwards are an effective hedging resource and also allow buyers to indicate the exact amount to be exchanged and the date on which to settle in the forward contract.
While a currency forward protects the buyer against any negative movements in the exchange rate, it also means that should the exchange rate move in their favour, they will not receive the more favourable rate.
Currency forwards are traded over-the-counter (they are not traded on a central exchange).