Forward is a currency exchange transaction, where you make a commitment to exchange at a future date a certain amount of one currency for another at a set rate, avoiding exposure to undesirable currency fluctuations. By setting the future currency exchange rate (hedging), you minimize the risk of currency rate variations.

Forward rate differs from the Spot foreign currency exchange rate with Forward points. The Forward points are calculated using as a base the interbank deposit and credit rate differences for the period in question. Forward points are added or subtracted from the Spot rate depending on the rate differential between the two currencies involved in the transaction.

For example, one month hence you have planned a business deal to be settled in Currency A, and therefore will need to purchase that currency, The interest rate of Currency A is 3%, but the rate of the to-be-sold Currency B is 2%. You contact the bank with your request to fix the currency rate and conclude a Forward transaction with the bank. To guard against the risk involved, the bank immediately buys in your stead Currency A and places it on deposit for a month, simultaneously borrowing Currency B for the same term.