Foreign Currency Forward Contract Law and Legal Definition

Foreign currency forward contract means a contract in which the parties to the contract undertake the obligation to exchange the given quantities of currencies at a pre-specified exchange rate on a certain future date. In a foreign currency forward contract, the terms of a contract are negotiated directly between the parties. Here the parties undertake such obligation on the belief that the prevailing exchange rate will move in a direction favorable to him/her by the expiry of the contract. It helps to reduce the foreign exchange risk that is usually faced by the parties. Foreign currency forward contract are over-the-counter contracts which are most useful when both parties have operations or some other interest in a country using a given currency. Multinational corporations conducting business in foreign countries often enter into currency forward contracts to fence their exposure with respect to anticipated acquisition or disposition of nonfunctional currency.