Forward Exchange Contract

A forward exchange contract is an agreement between two parties to exchange predetermined currencies at a predetermined date and time. It’s like Cinderella, except with currencies and some fun risk, no ill-fitting shoes attached.

Forward exchange contracts are not something you find on an exchange...instead, they’re something you’d do off the market, on the side with someone (it’s not sketchy and is totally normal....promise).

Investors make these contracts either to speculate and make some cash, or to hedge their position on a foreign exchange, which can reduce their risk and overexposure to a currency market. While forward exchange contracts can be any currency, the “major pairs” as they’re known are: the USD and the euro; the USD and Japanese yen; the USD and the British pound sterling; and...yep...the USD (again) and…the Swiss franc.