Converting funds into the currency of a country in which they wish to invest. The spot rate is available only to banks and foreign exchange brokers because their trades are worth many millions of dollars. A forward rate is an exchange rate at which two parties agree to exchange currencies on a specified future date. The forward market is the market for currency transactions at forward rates. Forward rates are helpful to a company that knows it will need a certain amount of a currency on a certain future date.
Companies often use the forward market to insure against unfavorable changes in exchange rates.
Forward contracts belong to a family of financial instruments known as derivatives-instruments whose values derive from other commodities or financial instruments. A Brazilian importer can use forward contract to pay marks to its German supplier in 90 days and still protect itself from a potential adverse change in exchange rates. A currency is trading at a premium when its forward rate is higher than its spot rate. A currency is trading at a discount when its forward rate is lower than its spot rate. A currency swap is the simultaneous purchase and sale of foreign exchange for two different dates.