Forward transaction

An agreement / contract specifying the terms for a future transaction to buy and sell foreign currency. In this transaction, the buyer and seller agree in advance the future exchange rate (i.e. the value of one currency in terms of the other currency), the date for the transaction to be made, and the transaction amount. The future exchange rate is calculated based on the spot rate, plus difference between interest rates on the currencies for the transaction term. For example: In two weeks you are about to receive a certain amount in NIS, and wish to buy US Dollars for it. The current exchange rate is NIS 3.50 for USD 1, but you are concerned about the exchange rate changing in two weeks' time. To ensure this exchange rate, you can use a forward contract to specify the exchange rate, amount and date for the future transaction.