Currency Forward Contracts

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  • A currency forward contract involves two currencies and two interest rates. A currency forward contract lets you lock-in a pre-defined price at which you can buy/sell a currency on a future date.
  • Contract parties commonly enter into currency forwards with the objective of hedging exchange rate risk exposure.
  • The interest rates can be interpreted as a net cash flow yield of investing one currency in a risk free asset and borrowing the other currency.

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