What is a forward contract? What does it mean to hedge?
One term that is frequently used in the foreign exchange industry is the word “hedge”. It refers to an action taken to protect the client from foreign currency fluctuations. The coverage is similar to an insurance policy, in that it guarantees the purchaser protection against adverse market conditions. The purchase of a forward contract is an agreement to buy or sell currencies for settlement up to a year in the future at predetermined exchange rates. This is used when a client wants to reduce currency fluctuation risk on accounts payable issues when dealing with foreign suppliers. Forward contracts require a percentage deposit to initiate the process.
