Currency forwards are Over-The-Counter (OTC) derivatives that lock in an exchange rate for a currency pair for settlement on an agreed date in the future.
Forward contracts are fully flexible in terms of notional amounts and maturities, although one-month or three-month forwards are most commonly used for hedging purposes.
Forward contracts are often closed out before maturity through an off-setting transaction. If the exchange rate has gone up during the life of the transaction, the seller of the base currency has to pay the difference in value to the buyer, and vice versa if the exchange rate has gone down. If the contract is not closed out, the notional amount of the two currencies is exchanged between the parties.
Keywords: OTC, Forward, spot exchange rate, basis point.