OUTRIGHT FORWARDS

An outright forward transaction, like a spot transaction, is a straightforward single purchase/ sale of one currency for another. The only difference is that spot is settled, or delivered, on a value date no later than two business days after the deal date, while outright forward is settled on any pre-agreed date three or more business days after the deal date. Dealers use the term “outright forward” to make clear that it is a single purchase or sale on a future date, and not part of an “FX swap” (described later).

There is a specific exchange rate for each forward maturity of a currency, almost always different from the spot rate. The exchange rate at which the outright forward transaction is executed is fixed at the outset. No money necessarily changes hands until the transaction actually takes place, although dealers may require some customers to provide collateral in advance.

Outright forwards can be used for a variety of purposes—covering a known future expenditure, hedging, speculating, or any number of commercial, financial, or investment purposes.

The instrument is very flexible, and forward transactions can be tailored and customized to meet the particular needs of a customer with respect to currency, amount,and maturity date.Of course, customized forward contracts for nonstandard dates or amounts are generally more costly and less liquid, and more difficult to reverse or modify in the event of need than are standard forward contracts. Also, forward contracts for minor currencies and exotic currencies can be more difficult to arrange and more costly.