“Open forward contract”

definition

An open forward contract is an agreement between two parties to exchange currencies at a predefined exchange rate on a future date. This can be done in one go – an outright forward – or in partial settlements over a limited period of time, normally up to 24 months.

This over-the-counter agreement is also referred to as a flexible forward, as it gives the holder some flexibility regarding the delivery of the contract. In contrast with an outright forward contract, an open forward allows the buyer to make as many drawdowns as they wish within the duration of the contract, so long as the entire contract is paid in full by maturity.

For example, a US company knows it will have to pay a number of invoices from a supplier based in the Eurozone during the next year. They decide to purchase a 12-month open USD-EUR forward contract, allowing them to make drawdowns to pay the supplier in euros, as and when necessary, over the course of that year.