A forward is a contract that locks in the price at which a counterparty can buy or sell a currency on a future date.

The exchange rate is typically today’s rate, adjusted for the interest rate differential in the two currencies. If the interest rate in the local currency is higher than that of the USD (or whatever the reference currency is), the FX forward will include a devaluation expectation.

A forward can be used to hedge the foreign exchange exposure of a loan or an equity stake when the counterparty only wants to protect the principal repayment. Roll-over hedging strategies for loans or equity typically use forwards to reduce unnecessary cash flows.