What Is a Forward Contract?
A forward contract lets you lock in an exchange rate for a future transaction. It removes uncertainty from international payments.
Key Takeaways
- A forward contract locks in an exchange rate for a transaction that will occur in the future.
- It eliminates rate uncertainty, but you can't benefit if rates move in your favour.
- Forwards are available from banks and specialist FX providers — typically with no upfront fee.
How a forward contract works
A forward contract is an agreement between you and an FX provider to exchange a specified amount of currency at a fixed rate on a future date. If today's GBP/USD rate is 1.27 and you need to pay $100,000 in 90 days, you could lock in a 90-day forward rate of, say, 1.25. Whatever happens to the market rate, you pay £80,000 (100,000 ÷ 1.25) — no more, no less.
The trade-off
The certainty of a forward contract comes at a cost: you surrender the upside. If the dollar weakens to 1.30 by the time payment is due, you would have been better off waiting — but you're locked in at 1.25. Forwards are a risk management tool, not a speculative one. Use them to protect a known future cash flow, not to bet on currency movements.
Forward vs spot
A spot transaction converts currency at today's rate for immediate (typically two-day) settlement. A forward converts at a rate agreed today for settlement at a future date. The forward rate differs from the spot rate by the interest rate differential between the two currencies — it's not a prediction of where the rate will go.
Where to get one
Your bank offers forward contracts, but specialist FX brokers (Wise Business, Equals Money, Moneycorp, Currencies Direct) typically offer better rates and more flexible terms. For amounts above £10,000, the savings from using a specialist vs your bank can be material. Most forward contracts require no upfront payment — you pay at maturity.