The forward market facilitates the trading of forward contracts on currencies. A forward contract is an agreement between a corporation and a commercial bank to exchange a specified amount of a currency at a specified exchange rate (called the forward rate) on a specified date in the future.
According to J.C Hull, “A forward contract is particularly a simple derivative. It is an agreement to buy or sell an asset at a certain future time.”
When MNCs anticipate a future need for or future receipt of a foreign currency, they can set up forward contracts to lock in the rate at which they can purchase or sell a particular foreign currency.
Generally, a forward contract gives its holder both the right and full obligation to conduct a transaction involving another commodity or security- the underlying asset – a predetermined future date and at a predetermined future price.