Introduction

Foreign Exchange Forward deal refers to the deal that bank offers forward exchange contract to clients that the client is able to make exchange between two currencies at a certain FX rate in the future. As to the forward deal contract, both parties have the obligation to fulfill the contract at the delivery day.

Example

One Company has to pay USD 10 million as it imports goods from overseas in one year. Now the USD/CNY spot rate is 6.73, and the company makes a contract with the bank to buy USD (Sell CNY at the same time) at 6.85 in one year.
Through this deal, the company can avoid the FX risk in one year.

Main Risk

As the Spot Market fluctuates everyday through the contract, the Forward deal may incur loss due to MTM loss.