A forward exchange contract (or forward contract) is a binding obligation to buy or sell a certain amount of foreign currency at a pre-agreed rate of exchange on a specific future date. To take on a forward contract, you need to advise us of the amount, the two currencies involved, the expiry date and whether you would like to buy or sell the currency. It is possible to build in some flexibility to allow the purchase or sale of the currency between two pre-defined dates rather than having a single maturity date.
The benefit of a forward contract is that you can budget at a guaranteed rate of exchange, thereby overcoming any element of uncertainty associated with importing or exporting in a foreign currency.
The price of a forward contract is based on the spot rate at the time the deal is booked, with an adjustment representing the interest rate differential between the two currencies concerned. For example, a company needs to buy in UAE dirham in three months' time and enters into a forward contract when the UAE interest rates are higher than those in India. In order to meet our obligation under the contract, ADCB India will buy UAE dirhams now, paying for them in Indian rupees. We then pass on the benefit of the higher rate of interest we earn on the dirhams to you. The adjustment to the spot rate means that the forward contract rate might be more favourable than a spot deal rate. The reverse would apply if UAE interest rates were lower than Indian rates.
A forward contract is an obligation to buy or sell a certain amount of foreign currency on a pre-determined date. Even if your requirements change over the term of the contract, you are still obliged to the deal.
A forward contract commits you to the deal at a specific rate and you are not in a position to benefit from any favourable movements in exchange rates between the dates of booking the contract and completing the deal.
- No premium is payable
- Minimum deal size: None
- Maximum deal size: None
- Period: Up to one year
- Credit line: A credit line is required for forward contracts
- Currency pairs: Any freely convertible currency pair.