How to Calculate FX Forward

Updated March 23, 2017

An FX forward is shorthand for foreign exchange forward. A foreign exchange forward is a contract with a bank to exchange cash in one currency for cash in another currency at a future date. Companies use foreign exchange forward to hedge losses and as a speculative investment.

Determine the details of the contract. For example, Firm A enters into a foreign currency forward contract. In on month, Firm A will exchange £650 for 1,500 euros. The current exchange rate is one dollar for 1.25 euros. The exchange rate in one month ended up being one dollar for 1.6 euros. Firm A entered into the foreign currency forward because in one month, they owe 1,500 euros to Firm B, a German company.

Exchange the currency. In the example, Firm A would give the bank £650. The bank will give Firm A 1,500 euros.

Determine the gain or loss. In our example, Firm A pays £650 for 1,500 euros. If Firm A did not enter the foreign currency forward contract, then it would need to pay £609.3 to get 1,500 euros today. To calculate this, divide £975 by 1.6 euros. The 1.6 euros is the current exchange rate when the contract is due, as noted in Step 1. Since the company paid £650 for the 1,500 euros, it would have lost £40.60.

Cite this Article A tool to create a citation to reference this article Cite this Article

About the Author

Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.