Forward Agreement

Forward Contract

A forward is a written agreement between two parties to a deferred delivery at a designated future date.
Example: First party is an exporter; the exporter sold goods abroad in a Euro currency. The exporter does not want to expose his deferred income from the deal to currency exchange fluctuations.
To put it in numbers: The exporter will receive one million Euro in exchange for the goods in three months.

The exchange rate is US$1.2974 to €1.0. At present, the transaction net worth is US$1,297,400.

Understanding the risk, the exporter wants in the future to receive not less than the current exchange (less dollars). To hedge future income, the first party goes to the second party to agree on a future exchange rate. These kinds of transactions executed by an intermediary, usually a bank.

The following item is the profit and loss graph.
The profit and loss graph (Item: c1g) shows a conventional way to show changes in the underlying price and the outcome as a profit or loss. The (y) axis shows P&L (profit and loss), crossing is the (x) axis that shows the price scale. The arrow points at the price entrance point (20). If the price changes up to $22.00 the profit will be $2.00, if price drops to $18.00 then loss is $2.00.

This is a LONG position graph; long means owning the security, if the security slops upwards the long position wins, if it drops, it loses. Owning security means that you have ownership rights like any property that comes to mind, such as a car or a house, and you can sell, give away, or hold.