chapter  5
18 Pages

Hedging with Forward Contracts

A forward exchange contract is an agreement between a customer and a bank for the purchase or sale of a specified quantity of one currency in exchange for another, at a fixed rate of exchange and for settlement at a future date. The future settlement date, specified in the contract, is either a specific date (for an outright forward contract) or any time between two specified dates (for a value-date option contract). This chapter looks at forward contracts as a hedging instrument for currency exposures.