Key Takeaway
An FX forward is a contract that allows you to lock in an exchange rate today for a future currency transaction, helping your business avoid losses caused by foreign exchange market volatility.
It’s a practical tool for entrepreneurs managing international payments, providing cost certainty when paying suppliers, invoicing clients, or budgeting in foreign currencies.
Managing your business’s exposure to foreign currencies doesn’t always require complex derivatives. For many entrepreneurs, the best starting point is also the simplest: an FX forward.
An FX forward is a straightforward, customisable contract that lets you lock in an exchange rate for a future transaction. This removes uncertainty and helps you plan your business with confidence.
In this guide, we’ll break down:
✅ What an FX forward is and how it works
✅ How it compares to spot contracts
✅ When and why businesses use FX forwards
✅ Who can benefit most from using them
Let’s dive into the basics.
What Is an FX Forward?
An FX forward, or currency forward, is a financial agreement between two parties to exchange a specific amount of one currency for another at a fixed rate on a set date in the future.
FX Forward is commonly used by businesses to protect against exchange rate fluctuations when planning cross-border payments or receivables. Instead of leaving your future cash flows exposed to unpredictable market changes, an FX forward allows you to secure today’s rate, providing stability and clarity for your finances.
This makes it particularly useful for:
- Importers and exporters managing future invoices
- Service businesses billing or receiving payments in foreign currencies
- Companies budgeting for foreign currency expenses (e.g. salaries, rent, royalties)
Pros and Cons of FX Forwards
✅ Pros
- Exchange rate certainty: Lock in a rate now and eliminate surprises later
- Budgeting clarity: Know your exact payment or receivable amount in your local currency
- Custom terms: Choose the amount and date that fits your needs
- No upfront cost: Most providers don’t charge to set up a forward contract.
❌ Cons
- No gain from favourable moves: You’re locked in, even if the rate moves in your favour
- Binding commitment: You must settle the contract; cancellations lead to extra costs
- Margin may be required: Some providers ask for a deposit (e.g. 2%), especially on larger notional amounts.
- Counterparty credit risk: If your provider fails to deliver on the contract, you could face losses.
Tip: Use our hedging calculator to find which FX derivative best fits your business needs.
How to Set Up an FX Forward
To set up an FX forward, you agree on the key details with your provider. These include
- The currency pair you want to exchange (e.g. EUR/USD, GBP/EUR)
- The amount of currency
- The settlement date (when the exchange will take place)
- The forward rate you’ll use.
The forward rate is not the same as the current market (spot) rate. It’s adjusted based on the interest rate difference between the 2 currencies over the contract period. Your provider will calculate this rate and offer you a quote.
Once you agree to the rate, the contract is confirmed and cannot be changed. On the settlement date, the currency exchange takes place in one of two ways:
- In a deliverable forward, you receive or send the actual currencies.
- In a non-deliverable forward (NDF), you settle the difference in value using your local currency. This is common when dealing with restricted currencies like CNY or INR.
You can arrange FX forwards through financial institutions like banks, brokers, or fintechs. Many providers now offer a fully online process, making it easier for small businesses to access this hedging tool.
Use Case of FX Forward in Business
Let’s say a wine importer in Hong Kong needs to pay EUR 100,000 to a supplier in 3 months. The business is worried that the euro might become stronger, making the payment more expensive in HKD.
To manage this currency risk, the importer arranges a forward contract with the following terms:
- Amount: EUR 100,000
- Spot rate: 8.45 HKD/ EUR
- 3-month forward rate: 8.50 HKD/ EUR
- Settlement date: 3 months from today
- Agreed exchange rate: 8.50 HKD/ EUR
This means that in 3 months, the importer will pay HKD 850,000, no matter how the market rate moves.
| EUR/HKD Spot Rate in the Next 3 Months | Cost at Spot Rate | Cost with FX Forward (8.50) | Result |
|---|---|---|---|
| 8.60 | HKD 860,000 | HKD 850,000 | ✅You save money |
| 8.40 | HKD 840,000 | HKD 850,000 | ❌You pay more than spot price |
| 8.50 | HKD 850,000 | HKD 850,000 | No gain or loss |
This table shows how an FX forward provides cost certainty, even if the market rate moves. While the importer gives up the chance to benefit from a better rate, they avoid the risk of a worse one, making it easier to manage cash flow and pricing.
FX Forwards vs FX Spot: What’s the Difference?
If you’re dealing with foreign currencies, you’ve probably heard of both FX forwards and spot rates. The key difference is timing.
A FX spot is when you exchange currencies at the current market rate, usually settling within a couple of days. It’s what most people use when they need to send money right away.
An FX forward, on the other hand, is for future payments. You agree on a rate today, but the exchange happens 30, 60, or even 90 days later. It’s a way to lock in your costs and avoid surprises if the exchange rate moves.
Here’s a quick comparison:
| Feature | FX Forwards | FX Spot |
|---|---|---|
| Rate Agreement | Locked in today for future settlement | Current market rate at time of transaction |
| Settlement Date | Future (e.g. 30, 60, 90 days) | Typically within 2 business days |
| Use Case | Budgeting, hedging future obligations | Urgent or one-off currency needs |
| Flexibility | Fixed and binding | Flexible; trade anytime |
| Risk Exposure | Protected from market swings | Fully exposed to market movements |
Helpful: Check out our article on participating forwards to see how they compare with standard currency forwards.
Final Note
FX forwards can be a valuable tool for entrepreneurs handling international payments. If you know you’ll need to send or receive a specific amount in a foreign currency, locking in your rate today can help you stay focused on your business without worrying about currency fluctuations.
FAQs
Do FX forwards require upfront payments?
Usually not. Most FX forward contracts don’t require an upfront fee, but some providers may ask for a small deposit or margin (often around 1–3% of the contract amount), depending on the currency pair and contract terms.
