Forward exchange contract definition — AccountingTools | Forward exchange contract
AccountingToolsCPECoursesCPECoursesCPELogInHowtoTakeaCourseGroupDiscountsBooksBooksListedbyTitleArticlesArticlesTopicsIndexSiteArchivePodcastAccountingBestPracticesPodcastIndexPodcastSummaryDictionaryFAQsAboutAboutContactEnvironmentalCommitmentHomeAccountingToolsCPECourses/CPECoursesCPELogInHowtoTakeaCourseGroupDiscountsBooks/BooksListedbyTitleArticles/ArticlesTopicsIndexSiteArchivePodcast/AccountingBestPracticesPodcastIndexPodcastSummaryDictionary/FAQs/About/AboutContactEnvironmentalCommitmentHome/AccountingToolsAccountingCPECourses&BooksArticlesAccountingToolsCPECourses/CPECoursesCPELogInHowtoTakeaCourseGroupDiscountsBooks/BooksListedbyTitleArticles/ArticlesTopicsIndexSiteArchivePodcast/AccountingBestPracticesPodcastIndexPodcastSummaryDictionary/FAQs/About/AboutContactEnvironmentalCommitmentHome/WhatisaForwardExchangeContract?Aforwardexchangecontractisanagreementunderwhichabusinessagreestobuyacertainamountofforeigncurrencyonaspecificfuturedate.Thepurchaseismadeatapredeterminedexchangerate.Byenteringintothiscontract,thebuyercanprotectitselffromsubsequentfluctuationsinaforeigncurrency'sexchangerate.Theintentofthiscontractistohedgeaforeignexchangepositioninordertoavoidaloss,ortospeculateonfuturechangesinanexchangerateinordertogenerateagain.Forwardexchangeratescanbeobtainedfortwelvemonthsintothefuture;quotesformajorcurrencypairs(suchasdollarsandeuros)canbeobtainedforasmuchasfivetotenyearsinthefuture.Theexchangerateiscomprisedofthespotpriceofthecurrency,thebank’stransactionfee,andanadjustment(upordown)fortheinterestratedifferentialbetweenthetwocurrencies.Inessence,thecurrencyofthecountryhavingalowerinterestratewilltradeatapremium,whilethecurrencyofthecountryhavingahigherinterestratewilltradeatadiscount.Forexample,ifthedomesticinterestrateislowerthantherateintheothercountry,thebankactingasthecounterpartyaddspointstothespotrate,whichincreasesthecostoftheforeigncurrencyintheforwardcontract.Thecalculationofthenumberofdiscountorpremiumpointstosubtractfromoraddtoaforwardcont
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