What contract locks in a currency exchange rate for a future date?

A forward contract locks in a currency exchange rate for a future date. Two parties agree today on the currencies, amount, exchange rate, and settlement date, then complete the exchange later at that prearranged rate.

Currency forwards are commonly used by companies that expect foreign-currency payments or receipts. An importer can arrange to buy euros for a later invoice, while an exporter can lock in the home-currency value of a future sale. This reduces uncertainty, although it also means giving up the chance to benefit if the market later moves favorably.

Forwards are usually traded over the counter, so banks can tailor their maturity and notional amount. That distinguishes them from exchange-traded currency futures, which are standardized and typically require margin. A spot contract, by contrast, uses the current exchange rate for near-immediate settlement rather than a future delivery date.

The forward rate is not simply a guess about the future spot rate. It is linked to the spot rate and the interest-rate difference between the two currencies through covered interest-rate parity. A forward is generally binding for both parties, unlike an option, which gives its buyer a right but not an obligation.