How a forward works

1. Agree now: You and an FX provider agree on an amount, currency pair, rate, and settlement date.
2. Optional deposit: Some providers ask for initial margin and may make margin calls if the market moves.
3. Settle later: On the agreed date you exchange currencies at the locked rate—no surprises.

The “forward rate” reflects today’s spot rate plus/minus an interest-rate differential—so it isn’t a prediction, it’s math.

Simple example

You run a US business and must pay €100,000 in 90 days. EUR/USD is 1.1000 today. You book a forward to buy euros at 1.1000. If EUR/USD goes to 1.1600, you’re protected; if it drops to 1.0400, you give up that “gain” but you got certainty.

Pros & cons

When to use a forward

• Known FX exposure in the next 30–180 days (payroll, invoices, rent)
• Quoted customers in a foreign currency and need to protect your margin
• Board/finance requires budget certainty over “best guess” rates

Practical playbook

1. List upcoming foreign-currency payments by date and amount.
2. Hedge the non-flexible portion (e.g., 70–90%); leave a buffer for changes.
3. Choose settlement date windows that match your cash cycle.
4. Confirm collateral/margin terms and what triggers a margin call.
5. Document the trade ID and counterparty contact.

Alternatives to know

• Options: Pay a premium for downside protection with upside left open.
• Natural hedging: Match costs and revenues in the same currency.
• Spot + stablecoins: For very short horizons and small amounts (operational, not accounting).