Source: https://rivet.global/blog/fx-forward-contracts-explained
Published: 2026-10-24 · Updated: 2026-10-24 · By Rashidatou K.

# FX forward contracts explained for small businesses

What an FX forward contract is, how the forward rate is set, when a small business should use one, the risks and costs, and simpler alternatives such as natural hedging.

## Key takeaways

- A forward contract is an agreement to exchange a set amount of one currency for another on a future date at a rate fixed today.
- The forward rate is the spot rate adjusted for the interest rate difference between the two currencies. It is not a forecast.
- Forwards remove uncertainty on known future payments, such as a supplier bill due in 90 days.
- They are binding: if the deal behind the payment falls through, you still have to settle or close the contract, possibly at a loss.
- Many small businesses get most of the benefit from natural hedging and converting early, without a contract.

Say you sign a contract to buy €200,000 of equipment, payable in 90 days, and your company earns in dollars. If the euro rises 5% before you pay, the equipment costs you $10,000 more than planned. A forward contract lets you lock the rate now. It is the most common hedging tool, and it is often oversold to businesses that do not need it.

## How a forward works

You agree with a provider to buy €200,000 in 90 days at a fixed rate. On the date, you pay the agreed dollars and receive the euros, whatever the market rate is then.

| Day | Market rate (USD per EUR) | Your rate | Your cost |
|---|---|---|---|
| Today | 1.08 | 1.09 (forward) | Fixed at $218,000 |
| Day 90, euro up | 1.14 | 1.09 | $218,000; you avoided $10,000 extra |
| Day 90, euro down | 1.03 | 1.09 | $218,000; you missed a $12,000 saving |

Figures are illustrative. A forward gives you certainty, so you lose the upside along with the downside.

## Where the forward rate comes from

The forward rate is the spot rate adjusted for the gap between the two currencies' interest rates over the contract period. If dollar rates are higher than euro rates, the euro trades a little above spot in the forward market, as in the example. It is arithmetic, not a forecast.

## Costs and conditions

- **Margin in the rate.** Providers price a spread into the forward rate, as they do on spot conversions.
- **Deposit or collateral.** Many ask for a few percent up front, and more if the rate moves against you.
- **It is binding.** If the equipment order is cancelled, you still own the contract and must settle any loss to close it.

In some countries, forwards for business payments are offered by regulated payment firms as well as banks. Check that your provider is authorized for them.

## When a small business should use one

- A large, known payment or receipt on a fixed date
- Thin margins that a 5% move would wipe out
- A price already agreed with a customer or supplier in a foreign currency

## Simpler alternatives

**Natural hedging.** Pay costs in the currency you earn. If you have euro income, euro bills need no hedge. See [multi-currency cash flow forecasting](/blog/multi-currency-cash-flow-forecast).

**Convert early.** For a payment you know about and can afford to fund now, converting today and holding the currency removes the rate risk without a contract.

**Price in your own currency.** Where customers or suppliers accept it, the risk passes to them. The [USD or local currency guide](/blog/pay-suppliers-usd-or-local-currency) covers the trade-off.

The broader picture is in our [FX risk guide](/blog/foreign-exchange-risk-for-small-businesses).

## On Rivet

Rivet holds USD, EUR and GBP balances side by side on the Growth plan, so you can convert early at the rate shown and hold the currency until a bill is due. See [Pricing](/pricing).

## Questions

### What is an FX forward contract?

An agreement with a bank or currency provider to exchange a fixed amount of currency on a set future date, at a rate agreed today. It removes uncertainty about the rate on that payment.

### How is the forward rate calculated?

From today's spot rate, adjusted for the difference between the two currencies' interest rates over the period. A currency with higher interest rates trades at a discount in the forward market. The forward rate is not a prediction of where the rate will be.

### Do forward contracts cost money?

Providers earn a margin built into the forward rate, and many ask for a deposit or margin, often a percentage of the amount. If rates move against your contract, they may ask for more.

### What happens if I don't need the currency on the date?

You are still bound. Usually you can close the contract early or extend it, and you settle the difference between your contracted rate and the current rate, which can be a gain or a loss.