A Currency Forward is a contract between two parties in which one agrees to buy or sell a certain amount of currency at a specific exchange rate on a future date. This allows businesses and individuals to protect themselves from adverse changes in the foreign exchange market. For example, if you are planning to travel to Europe in six months and the current exchange rate for euros is $1.25 per euro, you could enter into a currency forward contract with your bank today in which you agree to purchase euros at $1.20 per euro.If the exchange rate rises above $1.25 by the time your trip rolls around, your bank will still give you euros at the contracted price of $1.20 per euro, regardless of what the market rates may be then. Conversely, if the exchange rate falls below $1.20 by your travel date, your bank will give you fewer euros than expected since they will have had to purchase them at a higher price on the open market.
