Forward Contract It is a contract between the bank and its customers in which the exchange/conversion of currencies would take place at future date at a rate of exchange in advance under the contract.
The essential idea of entering into a forward contract is to fix the exchange rate in advance and thereby avoid the exchange rate risk.
Forward Rates = spot rate +/- premium/discount
Forward contract is used for hedging the foreign exchange risk for future settlement. For example, An importer or exporter having FX contract limit may lock in current exchange rate by entering into forward contract with the bank to avoid adverse rate movement.
Two types of forward contract are available:
1. Fixed Date Delivery – Forward contract with settlement on a specific future date.
2. Optional Delivery – Forward contract with settlement within specific future period.
Maximum contract tenor is 12 months from the date of contract booking.