Which description best fits currency forward contracts?

Which description best fits currency forward contracts?

• A. A contract that swaps principal and interest payments in different currencies.
• B. A contract giving the buyer the right to exchange currency at a set price.
• C. An agreement to buy or sell a currency at a specific price on a future date, customized between two parties.
• D. A contract traded on an organized exchange with standardized terms.

Answer: (C)

Currency forward contracts are private, customized agreements to buy or sell a specified amount of one currency for another at a fixed exchange rate on a specific future date. The rate is agreed today, and both parties are obligated to complete the transaction at maturity. This over-the-counter, tailor-made nature distinguishes forwards from other instruments: futures are standardized and traded on exchanges with daily settlement and margin requirements; options give the right, but not the obligation, to exchange at a set price; and currency swaps involve exchanging principal and interest payments over time rather than a single future delivery. Therefore, the description that captures a bilateral, customizable agreement to transact at a set price on a future date is the best fit.

Currency forward contracts are private, customized agreements to buy or sell a specified amount of one currency for another at a fixed exchange rate on a specific future date. The rate is agreed today, and both parties are obligated to complete the transaction at maturity. This over-the-counter, tailor-made nature distinguishes forwards from other instruments: futures are standardized and traded on exchanges with daily settlement and margin requirements; options give the right, but not the obligation, to exchange at a set price; and currency swaps involve exchanging principal and interest payments over time rather than a single future delivery. Therefore, the description that captures a bilateral, customizable agreement to transact at a set price on a future date is the best fit.