What is a forward contract?

A forward contract is a foreign exchange agreement to buy one currency by selling another on a specified date within the next 12 months at a price agreed on now, known as the forward rate.

The forward rate is the exchange rate you agree on today to transfer your currency later. It can be calculated based on the spot rate and adjusted to take into account other factors like the time until transfer and which currencies you’re exchanging. The forward rate you agree on today doesn’t have to be the same as the rate on the day the exchange actually happens – hence the forward bit.

What are the pros and cons of a forward contract?

Forward contracts reduce your exposure to currency fluctuations and exchange rate changes. By locking in rates now, you can plan ahead with certainty knowing what your costs will be for buying and selling overseas – particularly helpful for small businesses who need to keep cash flow predictable and easy to manage.

There is, of course, a downside. By locking in a forward rate you’re committed to it, even if the exchange rate changes in your favour meaning you could have saved money if you’d opted for a spot contract at the time you needed to make the exchange instead. To counter this, you could opt to use a forward contract for a portion of your total foreign exchange rather than all of it.

A quick example:

  1. Steven owns an electronics firm in the UK but manufactures some component parts in Japan and so makes a large bulk order each year, which means he needs to exchange ¥5,000,000 Japanese yen annually.
  2. He speaks to his Clear Currency account manager and they discuss the current spot rate for an exchange and possible forward rates, as well as examining the potential to split the exchange between the two.
  3. With the current rate at ¥138 to the pound, Steven commits to a forward rate of ¥136 for an exchange in six month’s time, which means he knows what his costs will be and can plan his future cash flow without worrying about currency fluctuations.
  4. Six months later on the agreed settlement date, Steven transfers his pounds to Clear Currency and has his yen within two working days.
The Clear Currency effect:

Keep it simple

Fix a price

A forward contract lets you fix a price today for a foreign exchange in the future.

Agreed Date

The forward rate is the exchange rate you set for an exchange that will happen on an agreed date in the next 12 months.

Settlement date

The settlement date is the day you get your currency.


You may see it called a forward FX trade (the FX means foreign exchange) or forward transfer.

Related articles

Years of Zero - How Zero to Negative Interest Rates Affect FX HedgingOpinion

Years of Zero - How Zero to Negative Interest Rates Affect FX Hedging

Are you an exporter generating US Dollar revenues overseas? Have you previously considered hedging your future rates of conversion through forward contracts but decided against due to the high “give up” premium, the interest rate differential creating a significantly worse forward rate over the prevailing spot rate? Recent central bank actions through the slashing of interest rates may have helped you.

GBPUSD The oldest currency pair in the world, but where next?Guides

GBPUSD The oldest currency pair in the world, but where next?

There were fears a month ago that sterling could fall to its lowest level against the US dollar in its 200+ year history and despite reaching the depths of 1.1450, the lowest since June 1985, it still had some way to go to reach the all-time low of 1.05.

Claiming an overseas inheritance: a guide to currency exchangeGuides

Claiming an overseas inheritance: a guide to currency exchange

From making sure it’s legitimate to knowing what assets are liable to inheritance tax and how to repatriate any funds you may have inherited back to the UK as cost effectively as possible. This article explains how an inheritance from overseas works.

Retiring overseas: a guide to foreign exchangeGuides

Retiring overseas: a guide to foreign exchange

For many of us, the lure of cheaper living (up to five times cheaper in some countries), sunnier climes and an idyllic setting is too much to resist for our retirement - but what are the considerations when it comes to retiring with a foreign currency?

Paying your overseas property bills: a guide to foreign exchangeGuides

Paying your overseas property bills: a guide to foreign exchange

With the right approach and help you can side-step many of the hassles, pitfalls and costs that come from making regular payments in a foreign currency. Here we’ll take you through the common costs owning a property overseas brings with it and how you can best manage and economise them.

The Magic of Thingscase study

The Magic of Things

When it comes to an eye-catching, out of the ordinary business idea, things don’t get more weird and wonderful than The Magic of Things. Find out how we helped to save them thousands of pounds in transaction fees.

We use cookies to collect information about how you use our site. We use this information to make the website work as well as possible and improve our services.