Forward Cash Contract
Updated on July 18, 2023
A forward cash contract is a specific type of contract designed to mitigate the risk associated with fluctuating foreign exchange rates. It involves an agreement between two parties to exchange one currency for another currency at a predetermined exchange rate on a specified future date.
How does it work?
In this type of contract, the exchange rate is set and agreed upon at the time the contract is made. This means that both parties know exactly how much of one currency they will receive in exchange for a specific amount of the other currency at the designated future date.
The purpose of a forward cash contract is to protect against potential currency rate fluctuations. By locking in an exchange rate in advance, both parties can eliminate uncertainty and plan their financial transactions more effectively. This is particularly useful for businesses and individuals engaged in international trade or investments, as it allows them to hedge against the risk of unfavorable exchange rate movements.