In foreign exchange transactions, foreign exchange transactions where the delivery date is set at a certain period after the value date of spot foreign exchange transactions are called forward foreign exchange transactions. The future delivery date, exchange rate and monetary amount of foreign exchange transactions are all agreed in the contract in advance. Forward foreign exchange trading has many functions, the most important of which is to avoid foreign exchange risks in trade and finance.

How do companies use forward foreign exchange trading methods

Through forward foreign exchange transactions, the cost or income of foreign exchange in trade and finance can be fixed in advance, which is beneficial to economic accounting and avoids or reduces foreign exchange risks. For example, in international trade, the currency in the contract is often inconsistent with the currency held by the importer. The payment in the contract is usually at some time in the future. In order to avoid the change of exchange rate at the time of payment, importers can buy and sell forward foreign exchange in advance and fix the cost to avoid the foreign exchange risk caused by the change of exchange rate at the time of future payment. In international lending, it is often encountered that the currency of the loan is inconsistent with the currency of the actual operating income (usually the source of repayment funds), and the repayment of the loan is generally long-term. In order to avoid the change of exchange rate during repayment, the borrower can conduct forward foreign exchange transactions in advance and fix the repayment amount to avoid the foreign exchange risk caused by exchange rate changes in future repayment.