What Is an Outright Forward Contract?
An outright forward contract is a customised agreement between two parties to exchange an asset, often a currency, at a set price on a specific future date. Unlike a standard futures contract, the terms are negotiated directly rather than fixed by an exchange.
How an Outright Forward Differs From a Futures Contract
Futures contracts are standardised and traded on exchanges, with fixed sizes and settlement dates. An outright forward, by contrast, can be tailored to the exact amount and date the two parties require, which is why it’s commonly used in currency markets where bespoke amounts and dates are the norm rather than the exception.
Why Businesses Use Outright Forward Contracts
Companies with future foreign currency obligations, such as paying an overseas supplier, often use outright forwards to fix an exchange rate in advance, removing uncertainty over what the conversion will cost when payment is due.
Outright Forwards Are Binding Commitments: What to Keep in Mind
As a precaution, an outright forward contract obligates both parties to complete the exchange at the agreed rate, even if the market moves significantly in the meantime. There’s no opt-out if conditions change before settlement.
Fixing Tomorrow’s Rate Today
An outright forward contract gives two parties certainty over a future exchange rate, in exchange for a binding commitment to follow through. That trade-off between certainty and flexibility is at the heart of how these contracts are used.
⚠ Risk Warning:CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. Ensure you fully understand how CFDs work and whether you can afford to take the high risk of losing your money.
Back
