A currency forward contract is an agreement between two parties to exchange (buy/sell) an agreed quantity of a currency at an agreed future date. An important point regarding forward contract is that it is an agreement between two private parties bilaterally. Here, there is no stock exchange or such institutions in the execution of the contract. Hence a weakness of the contract is that there is high risk of default.
The main advantage of a forward is that it can be tailored to the specific needs of the firm and an exact hedge can be obtained. On the downside, these contracts are not marketable, they can’t be sold to another party when they are no longer required and are binding.
