A forward contract locks in today’s price for a future transaction. The two parties agree on the asset, the quantity, the delivery date, and the price. Unlike exchange-traded futures, forwards are customized and traded over-the-counter (OTC), meaning they can be tailored to specific needs.
Forward contracts are commonly used in foreign exchange, commodities, and interest-rate markets. Businesses use them to protect against price changes—such as currency swings or rising commodity costs—before the actual transaction happens. Because forwards are private agreements, they come with counterparty risk: the possibility that one side might not fulfill the contract.
These contracts do not require daily settlement. Instead, profit or loss is realized only on the delivery or settlement date. This structure makes forwards flexible but less standardized and less liquid than futures. Despite that, they remain a key tool for risk management and long-term planning.
Forward contracts help companies and investors manage exposure to uncertain future prices. They provide stability, reduce risk, and allow better budgeting and planning.
A forward contract settles on the agreed future date. If the market price is above the contract price, the buyer gains since they locked in a lower rate. If the market price is below the contract price, the seller gains. Settlement can be physical (actual delivery of the asset) or financial (cash payment based on price difference). The method depends on the terms agreed at the start.
Businesses often use forwards to protect themselves from currency fluctuations. For example, a company expecting payment in a foreign currency can lock in today’s exchange rate for a future date. This protects revenue and budgeting even if the currency weakens later. Many importers and exporters rely on currency forwards to stabilize their cash flows.
Forwards lack the clearinghouse protection that futures exchanges provide. Because they are private agreements, one party may fail to deliver or pay at settlement. This counterparty risk can be significant, especially in long-term contracts. Futures, in contrast, are standardized, exchange-traded, and backed by margin requirements that reduce default risk.
A European company agrees to buy raw materials from a U.S. supplier in three months. To avoid uncertainty in the EUR/USD exchange rate, the company enters a forward contract to lock in today’s rate for future payment.
FinFeedAPI’s Currencies API supports real-time and historical FX data that companies use when pricing or evaluating forward agreements, especially when analyzing currency trends and settlement projections.
