Guides Forward Contracts

Guide 25 July 2026

What Is a Forward Contract?

A practical SME guide to FX forward contracts, including forward rates, deposits, margin calls, settlement, cancellation risks and worked examples.

Use FX Forwards to Manage FX Risk

An FX forward contract lets a business agree today to exchange a specified amount of one currency for another on a future date or within an agreed future window. The exchange rate is fixed when the contract is booked.

For an importer, this can fix the home-currency cost of a known overseas supplier payment. For an exporter, it can fix the home-currency value of a confirmed foreign-currency receipt. The main benefit is budget certainty, not a guaranteed saving.

A forward is a binding contract. If the market later moves in the business's favour, the business normally must still exchange the contracted amount at the agreed forward rate. If the underlying invoice is cancelled, delayed or paid for a different amount, the forward does not automatically disappear.

How Is a Forward Different From a Spot Transfer?

A spot transfer exchanges currencies for settlement in the near term. A forward separates the booking date from the future settlement date.

Feature	Spot transfer	Forward contract
Rate agreed	When the near-term transfer is booked	Before the future settlement date
Settlement	Normally in the near term	On a specified date or within an agreed window
Main purpose	Exchange funds that are ready to send	Create certainty for a future currency requirement
Obligation	The currencies are exchanged as booked	The contracted currencies must be delivered at settlement
Market movement	The customer receives the rate available when booking	Later market movements do not change the contracted rate

Forward contracts are generally arranged directly with a bank or FX provider rather than traded on an organised exchange. Their amounts, currencies, settlement arrangements and other terms can therefore vary.

The Forward Rate Is Not a Forecast

The forward rate usually begins with the current spot rate and is adjusted using forward points. These points primarily reflect the interest-rate difference between the two currencies for the relevant period. The provider's pricing or spread may also affect the customer rate.

A currency trading at a forward premium is not guaranteed to strengthen, and one trading at a forward discount is not guaranteed to weaken. The forward rate is a contractual price for future settlement, not a prediction of the spot rate on that date.

When comparing quotes, ask each provider to use the same:

currencies and direction of exchange;
foreign-currency amount;
booking and settlement dates;
fixed-date or window-forward structure;
deposit or credit terms; and
fees, spread and amendment conditions.

Worked Importer Example

The following figures are illustrative only and are not current market quotes.

An Australian importer has a confirmed USD 100,000 supplier invoice due in 90 days. Its gross margin is based on the Australian-dollar cost remaining close to the amount in its purchase budget.

The business is offered an illustrative forward rate of AUD 1 = USD 0.6470. It books a contract to buy USD 100,000 for approximately AUD 154,560 in 90 days.

At settlement:

if the spot rate is AUD 1 = USD 0.6200, buying USD 100,000 at spot would cost approximately AUD 161,290. The forward has protected the budget from that adverse move;
if the spot rate is AUD 1 = USD 0.6800, buying USD 100,000 at spot would cost approximately AUD 147,059. The business must still settle its forward for approximately AUD 154,560.

The second outcome is not evidence that the original decision was wrong. The forward achieved its stated purpose: it fixed the cost when the business committed to the supplier invoice. The trade-off was giving up the benefit of a later favourable rate.

Worked Exporter Example

The following figures are also illustrative.

A UK exporter expects a confirmed EUR 80,000 customer payment in 60 days. It books a forward to sell EUR 80,000 at an illustrative rate of GBP 0.8550 per euro, fixing expected proceeds of GBP 68,400.

The exporter still carries customer-payment risk. If the customer pays late, pays only EUR 70,000 or does not pay, the exporter remains responsible for delivering EUR 80,000 under the forward unless the provider agrees to vary the contract. It may need to use existing euros, buy the shortfall or close out or extend the forward at the prevailing market value.

This is why the amount and settlement date should be based on sufficiently certain cash flows rather than an optimistic sales forecast.

Who Can Use a Forward Contract?

Eligibility varies by provider, country, customer type, currency and transaction purpose. Some providers offer forwards only to businesses or wholesale clients; others may support eligible individuals making a documented large payment.

Before offering a forward, a provider may assess:

the legal entity and people who control it;
the commercial purpose of the payment;
the currencies, amount and requested term;
the certainty of the underlying invoice or receipt;
the customer's financial position and credit risk; and
the documents required under local regulation.

Account approval does not mean every forward request will be accepted. Less commonly traded or restricted currencies may have limited availability or different settlement structures.

Deposits, Credit and Margin Calls

There is no universal forward-contract deposit. Depending on the provider and its assessment, the customer may be asked for an initial security payment, offered a credit facility, or required to fund the contract in another way.

The contract may also allow the provider to request additional security if the market moves far enough against the agreed forward position. This is often described as a margin call. It does not change the contracted rate; it protects the provider against the risk that the customer does not settle.

Before booking, ask:

how much security is required initially;
whether additional margin can be requested;
how quickly a margin call must be paid;
whether the security is returned or applied to settlement;
what happens if the business cannot meet a margin call; and
whether the arrangement affects working capital or existing credit facilities.

Do not treat a deposit as the maximum possible cost. Close-out losses, amendment charges or other amounts may be payable under the contract.

What Happens on the Settlement Date?

For a deliverable forward, the customer provides the currency it agreed to sell, and the provider supplies the currency it agreed to buy. The converted funds can then be sent to the beneficiary or credited according to the account arrangements.

Check the funding deadline rather than assuming funds can be supplied at any time on the maturity date. Time zones, bank cut-off times, holidays and compliance checks can affect settlement.

Keep the forward confirmation with the related invoice, purchase order or receivable. The business's accountant may also need the contract rate, settlement amount and any gain or loss information for bookkeeping and tax reporting.

What If the Payment Date or Amount Changes?

A forward should not be treated as a flexible reservation unless its terms specifically provide that flexibility.

Early Settlement

Some providers may allow part or all of the contract to settle before the original maturity date. The rate or cost may be adjusted because the original forward points were calculated for a different period.

Extension or Rollover

If an invoice or customer receipt is delayed, the provider may agree to move the settlement date. This generally involves closing or adjusting the original position and pricing a replacement period. The market value of the original contract can create a cost or credit.

Partial Use

A window forward or drawdown structure may allow the customer to use portions of the contract during an agreed period. Check minimum drawdowns, notice requirements and what happens to any unused balance.

Cancellation or Close-Out

If the underlying transaction is cancelled, the forward usually must be closed out rather than simply abandoned. The provider compares the contracted position with current market conditions. The customer may owe a close-out amount, or in some circumstances receive a credit, subject to the contract terms.

Advantages and Risks for SMEs

Potential Advantages

Fixes the home-currency value of a known future payment or receipt.
Makes budgets, quotes and gross margins easier to manage.
Reduces reliance on predicting the exchange rate near the payment date.
Can support staged or window-based settlement when those structures are available.

Important Risks and Limitations

The contract is binding even if the market later moves favourably.
The business still carries the commercial risk that a supplier order or customer payment changes.
Deposits or margin calls can reduce available working capital.
Extensions, early settlement and cancellations can change the cost.
The provider and currency may become a source of counterparty or settlement risk.
Hedging more than the confirmed exposure can create a new currency position rather than reduce risk.

How Much of an Exposure Should Be Hedged?

There is no percentage that suits every business. A practical policy can distinguish between:

contracted invoices or receivables with high certainty;
probable payments supported by purchase orders;
forecast sales or expenses that may change; and
currency amounts naturally offset by receipts and payments in the same currency.

Some businesses hedge only confirmed commitments. Others hedge portions in stages as certainty increases. The decision should reflect cash-flow tolerance, gross-margin sensitivity, customer or supplier reliability and the contract's liquidity requirements.

Forwards are only one approach. Alternatives can include converting early, holding supported foreign-currency balances, matching receipts with costs, invoicing in the home currency or accepting some exchange-rate variation. An FX option may provide protection with different rights and costs, but it is not the same as a forward.

Read How Currency Fluctuations Affect Profit Margins and our business FX risk case studies for broader context.

Forward Contract Checklist

Before signing:

confirm the underlying payment or receipt is sufficiently certain;
match the currency, amount and settlement date to that exposure;
ask how the forward rate and provider spread are calculated;
understand the deposit, credit and margin-call terms;
check the funding deadline and beneficiary-payment process;
review the rules for drawdowns, extensions and early settlement;
ask how cancellation and close-out values are calculated;
confirm the provider entity and applicable regulation; and
obtain accounting, legal or financial advice where appropriate.

Best Exchange Rates

Transfers Spend & Travel

BER compares exchange rates from banks and FX specialists.

Frequently Asked Questions

Does a forward contract guarantee a better exchange rate?

No. It guarantees the contracted rate for the agreed amount and settlement terms. The future spot rate may be better or worse. The benefit is certainty.

Is the forward rate today's spot rate?

Usually not. The spot rate is adjusted by forward points for the period, and the customer quote can also include the provider's spread or pricing.

Is the forward rate a forecast?

No. Forward points principally reflect interest-rate differences between the currencies. They do not predict where the spot market will trade at maturity.

Can a forward contract be cancelled?

It may be possible to close out the contract, but this can create a cost or credit based on current market conditions and the provider's terms. Cancellation does not normally mean walking away without a financial adjustment.

What happens if the customer pays an exporter late?

The forward obligation remains unless the provider agrees to change it. The exporter may need to fund the contracted currency from another source, extend the contract or close it out.

Is a deposit always required?

No single rule applies. Requirements depend on the provider, customer, currencies, amount, term and credit assessment. Additional margin may also be required under some contracts.

More Business FX Guides From Best Exchange Rates

Business International Payments and FX for SMEs

How to Pay Overseas Suppliers

Managing Business FX Risk

What Are Limit Orders?

Compare Multi-Currency Accounts

Methodology and Sources

This guide was substantively reviewed on 25 July 2026. Forward-contract eligibility, security requirements, available currencies, settlement periods and amendment terms vary by provider and jurisdiction.

This article provides general information and does not take account of your business's financial situation. Forward contracts are binding financial products and can involve losses or additional funding requirements. Consider professional financial, accounting, legal or tax advice where appropriate.