What is a forward contract?
A forward contract is an agreement to exchange a set amount of currency at a rate fixed today, for a payment that will happen on a future date. The rate is locked in regardless of how the market moves — giving you a known cost to plan around. Forward contracts can typically be arranged for up to 12 months ahead and are used by property buyers, businesses, and individuals to remove currency risk from large international transfers.
This guide explains what forward contracts are, how they work in practice, the different types available, and when they make sense for property buyers, UK businesses, and individuals making large international transfers.
What Is a Forward Contract?
A forward contract is a private agreement between two parties to exchange a set amount of currency at a fixed rate on a specified future date. Once agreed, the rate is locked — regardless of how the market moves between now and settlement.
In the context of currency transfers, forward contracts are used to protect against exchange rate fluctuations. If you have a known payment coming up — a property completion, a supplier invoice, an overseas pension — a forward contract gives you certainty over the cost before the payment is due. Find out why banks typically give worse exchange rates on international transfers and how a specialist broker compares.
Forward Contract Key Terms Explained
Forward rate — The exchange rate agreed today for a future transaction. It reflects the current spot rate adjusted for interest rate differentials between the two currencies.
Settlement date — The agreed date on which the currency is exchanged and the contract completes.
Notional amount — The quantity of currency being exchanged under the contract.
Counterparty — The other party to the contract — in most cases, your currency broker or financial institution.
Deposit — Depending on the size and duration of the contract, a deposit (typically around 10%) may be required to secure the rate. For existing clients, this is sometimes waived.
How Does a Forward Contract Work?
The process has four steps:
- Agree the rate — Tell us the currency pair, amount, and your required settlement date. We quote you a live forward rate.
- Lock it in — You confirm the contract. The rate is fixed from that point, regardless of market movement.
- Pay a deposit if required — For new clients or larger contracts, a deposit secures your position.
- Transfer funds on settlement date — You send the agreed sterling amount and receive the agreed foreign currency at the locked-in rate.
The key point: whatever happens to the market between the contract date and the settlement date, your rate doesn’t change. For a deeper look at how international bank transfers work and how long they take, see our full guide.
Forward Contract Example: Property Buyer
A UK buyer is purchasing a property in France for €350,000. Completion is in 14 weeks. At the time of agreeing the purchase, GBP/EUR is 1.15 — meaning the cost in sterling is approximately £304,000.
The buyer takes out a forward contract at 1.15, locking in that rate. Over the following weeks, GBP/EUR drops to 1.10. Without the forward contract, the same €350,000 would now cost £318,000 — a difference of £14,000.
Because the rate is fixed, the buyer pays exactly £304,000 as planned. The forward contract has protected both the budget and the deal. If the rate had moved favourably instead, the buyer would not benefit from that improvement — that is the trade-off. A forward contract provides certainty, not speculation. See our full guide to buying property abroad for more on how currency works in international property transactions.
Forward Contract Example: Business Payment
A UK importer orders €200,000 of goods from a European supplier, with payment due in 60 days. GBP/EUR is currently 1.14.
Without a forward contract: if sterling weakens to 1.10 before payment, the invoice costs an additional £6,500 in sterling terms. With a forward contract at 1.14: the cost is fixed at £175,438 regardless of market movement. The business knows its margin before the goods even arrive. See our guide on the best way to pay overseas suppliers from the UK for more on protecting margins from currency moves.
Forward Contract vs Spot Rate — Sterling cost of €350,000 payment over 14 weeks
GBP/EUR moves from 1.15 to 1.10. Forward contract rate stays fixed at 1.15.
Types of Forward Contract
Fixed forward contract — The exchange occurs on a specific agreed date. The most common type for property completions and large one-off payments where the date is known.
Window (flexible) forward contract — The exchange can occur at any point within an agreed date range rather than on a single fixed date. Ideal when the exact settlement date is uncertain — for example, a property completion that could fall within a two-week window.
Open forward contract — Allows drawdowns against the contract over time rather than in a single exchange. Useful for businesses making staged payments or individuals funding regular overseas costs. See our guide on currency hedging for UK small businesses for more on how open forwards fit into a broader FX strategy.
Forward Contract vs Spot Transfer: Which Should You Use?
A spot transfer is a straightforward currency exchange at today’s rate, settled within one to two business days. It’s the right choice for immediate payments where timing is known and there’s no future rate risk.
A forward contract is the right choice when your payment falls on a future date, you want to remove exchange rate uncertainty from a budget, or the amount is large enough that a rate move would have a material impact. Our guide to transferring large sums internationally explains how spot transfers and forward contracts are typically combined on significant transactions.
| Spot Transfer | Forward Contract | |
|---|---|---|
| Rate | Today’s live rate | Fixed rate agreed today |
| Settlement | 1–2 business days | Future date (up to 12 months) |
| Best for | Immediate payments | Future payments with known date |
| Rate risk | None (settle now) | Eliminated |
| Upside if rate improves | Yes | No — rate is fixed |
Benefits and Drawbacks of Forward Contracts
| Detail | |
|---|---|
| Benefit | Rate is fixed — no exposure to market moves |
| Benefit | No need to monitor the market daily |
| Benefit | Flexible contract types to match your timeline |
| Benefit | Can be arranged quickly once a deal or payment is agreed |
| Drawback | You don’t benefit if the rate moves in your favour |
| Drawback | A deposit may be required to secure the contract |
| Drawback | The contract is binding — closing early may result in a gain or loss |
The trade-off is simple: certainty in exchange for flexibility. For most buyers and businesses with a fixed obligation, certainty is the priority. If you want to keep some exposure to a rate improvement, a limit order or partial forward is worth discussing with a specialist.
Who Uses Forward Contracts?
Property Buyers
Locking in the rate between offer acceptance and completion is the most common use case. Completion dates can be 6–16 weeks away and sometimes much longer — a forward contract removes the currency risk from that entire window. This applies whether you’re buying property in Spain, France, Portugal, or further afield. See our guide on where UK citizens can buy property abroad for country-specific currency considerations.
UK Businesses
Any company making regular payments in euros, dollars, or other currencies benefits from fixing costs rather than absorbing monthly rate movements. Our dedicated guide to forward contracts for UK businesses covers how to use them for supplier payments, export invoicing, and payroll. See also how exchange rates affect UK business profits and where the exposure typically sits.
Expats and Individuals
Anyone transferring a significant sum to fund overseas living costs, a pension, or an inheritance can use a forward contract to secure the rate while the administrative process completes. This is particularly relevant for those transferring a UK pension overseas or managing regular income in a foreign currency. See also our guide on paying international school fees from the UK, where forward contracts are frequently used for fixed annual payment schedules.
How to Get a Forward Contract with Cambridge Currencies
Cambridge Currencies provides forward contracts for UK businesses, property buyers, and individuals making international transfers. Every contract is arranged personally — there is no automated platform. All transfers are processed through our FCA-authorised payment partners, and your funds are fully safeguarded throughout.
- Get a quote — Tell us the currency pair, amount, and your required settlement date. We provide a live forward rate with no obligation.
- Confirm the contract — Once you’re happy with the rate, the contract is locked. We confirm everything in writing.
- Settle on the agreed date — You send sterling and receive your foreign currency at the agreed rate.
Forward contracts are available for up to 12 months and can be arranged for most major currency pairs. Use our currency converter to check current live rates, or speak to a specialist to get a personalised forward contract quote. You can also request a free quote online.
Forward Contract Frequently Asked Questions
What is a forward contract in simple terms?
A forward contract lets you fix an exchange rate today for a payment you will make in the future. The rate stays the same regardless of how the market moves between now and your payment date.
What is a currency forward contract?
A currency forward contract is a binding agreement to exchange one currency for another at a fixed rate on a future date. It is commonly used to protect against exchange rate movements on property purchases, business payments, and large personal transfers.
How does a forward contract work for property buyers?
Once your offer is accepted, you lock in the current exchange rate using a forward contract. When the purchase completes, you exchange at that fixed rate — protecting your budget from currency changes during the weeks or months between offer and completion.
Do forward contracts cost money?
The forward rate includes a small adjustment based on interest rate differences between the two currencies, rather than a separate fee. A deposit (typically around 10%) may be required for larger contracts. Full pricing is confirmed before you commit to anything.
What is the difference between a fixed and flexible forward contract?
A fixed forward contract settles on a specific agreed date. A flexible (or window) forward contract allows you to draw down funds at any point within an agreed timeframe — useful when your exact completion or payment date isn’t certain.
How far in advance can I lock in a forward contract?
Forward contracts are typically available for up to 12 months ahead, depending on the currency pair and the size of the contract.
Can I use a forward contract for regular payments?
Yes. An open or flexible forward contract allows you to make multiple drawdowns over time, making it suitable for regular overseas payments such as mortgage instalments, pension transfers, or employee payroll.
What happens if I no longer need the forward contract?
Forward contracts are binding agreements. If your plans change, the contract must be closed out, which may result in a gain or a loss depending on how the market has moved since the contract was agreed.
What are the advantages and disadvantages of forward contracts?
The main advantage is certainty — your exchange rate is fixed and you know exactly what your payment will cost in sterling. The main disadvantage is that you will not benefit if the market moves in your favour after the contract is agreed.
