Currency Forwards

Private agreements between two parties to exchange a specific amount of one currency for another at a fixed exchange rate on a future date. They are most often used by businesses that want to protect themselves from currency fluctuations when they know they will need to convert money at a later time. Because these contracts are customized and traded over the counter they can be tailored to match the exact timing and amount needed. 

For example, an importer in Israel who knows they will need to pay a US supplier in three months might worry that the dollar will strengthen by then making the purchase more expensive in shekels. By entering into a currency forward contract now they lock in the current exchange rate and remove that uncertainty.

This is not the same as simply waiting and exchanging money at the spot rate on the day of payment which would leave them exposed to market changes. And unlike a currency option a forward contract is binding and both sides must follow through. 

Currency forwards are foundational tools in FX risk management often used alongside other instruments like cross currency swaps or as part of strategies such as covered interest arbitrage. They directly address exchange rate risk and are especially relevant to companies with predictable foreign currency cash flows like exporters, importers or businesses operating in multiple markets.