FX forward
Agree today on the exchange rate for a future currency exchange. Compare that contractual rate with market conditions and follow the resulting value and P&L.
How it works
The first currency of the pair is the base currency; the second is the quote currency. Buying the forward means buying the base currency at maturity. Selling reverses the exposure. The notional is entered in base currency, while the contract value is calculated in quote currency.
Key contract terms
- Currency pair and its direction
- Notional in base currency
- Buy or sell
- Contractual forward rate
- Trade date and maturity date
Payoff: the contractual result
For a purchase, value before maturity equals notional × (market forward rate − contractual rate) × the quote-currency discount factor. At maturity, the exact spot rate replaces the forward rate and the discount factor is one. A sale reverses the sign. These amounts describe economic value, not a recorded currency payment.
A simple example
Buy EUR 100,000 against USD at 1.10 USD per EUR. With an exact maturity rate of 1.12, final contract P&L is 100,000 × (1.12 − 1.10) = USD 2,000. The corresponding sale produces USD −2,000.
Illustrative amounts exclude fees and currency conversion. A payoff is distinct from the instrument's value before maturity.
Lifecycle
- Contract created
- Open exposure
- Exchange rate at maturity
- Final result once data is confirmed
- Create the contract with its currency pair, notional, agreed rate and maturity.
- The position remains open until its contractual maturity; interim valuations do not close it.
- At maturity, the exact contractual-date exchange rate determines the final result. Missing data leaves finalization pending.
- A successful final valuation realizes the result and removes open exposure. This is not confirmation of a bank payment.
Using this instrument in OTCValue
Valuation depends on the selected pair, available forward and discount curves, and exact historical data at maturity. Portfolio conversion needs a separate FX rate. The application does not execute the exchange, confirm settlement or manage bank payments. A missing final observation remains visible rather than being treated as a completed contract.