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FX forwards are suitable for hedging income and expenses in foreign currencies. An FX forward fixes the rate used in a future FX trade, hedging the future cash flow against FX rate fluctuations.
An FX forward fixes the future FX rate
In an FX forward, the contracting parties agree on the rate used in a future FX trade, that is, the forward rate, the time of the trade, the currencies to be bought and sold and the amount of currency to be exchanged. The forward rate may be higher or lower than the prevailing FX rate, called the spot rate. The forward rate is based on the spot rate and the interest rate spread between the two currencies.
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- The FX forward offers full protection against unfavourable FX movements.
- You will know the rate used in a future FX trade and the euro amount needed for or received from the trade in advance.
- A forward will offer full protection against unfavourable FX movements, but on the other hand, you will not be able to benefit from favourable movements, either.
For hedging income and expenses in a foreign currency
An FX forward is a hedging instrument that protects the margins of a company engaged in foreign trade against FX movements.
A forward will fix the rate of a future FX trade. The forward rate is determined on the basis of the market rate at the time of concluding the contract as well as on the basis of forward points based on the spread of the currency pair. A forward will offer full protection against unfavourable movements, but on the other hand, you will not be able to benefit from favourable movements, either.
As in a regular FX trade, the contracting parties agree in an FX forward what is the traded currency, how much is traded and what is the rate used in the trade. The only difference between a traditional FX trade and an FX forward is that the trade is agreed to take place in the future.
Similar to a traditional FX trade, no transaction fees are charged for an FX forward. This means that an FX forward is a zero-cost hedging solution in which the customer agrees to execute an FX trade in the future at a price agreed in advance.
The international FX market offers continuously updated quotes for forwards with different maturities. A forward rate deviates slightly from the rate of a traditional FX trade due to the spread between the currencies.
Terms and conditions
Executing hedges requires a customer relationship and a general agreement on derivatives with Nordea. Please contact our specialists for further information. We will be happy to help.