A spot deal exchanges currency now, at today's rate, and settles within a couple of working days. A forward contract fixes the rate today for an exchange on a future date. The difference is when the rate is decided and when the money moves.
Side by side
| Spot | Forward | |
|---|---|---|
| Rate fixed | Today | Today |
| Money moves | In about two working days | On the agreed future date |
| Rate used | Spot rate | Spot rate adjusted by forward points |
| Typical use | A payment due now | A payment or receipt due later |
| Rate risk after dealing | None | None on the amount covered |
Worked example
A UK business owes a US supplier US$250,000 in three months. Spot GBP/USD is 1.2600.
That £315 is not a fee. It is the forward points, which come from the gap between UK and US interest rates. They are not a forecast of where the rate will go.
If the rate falls to 1.2000 by the payment date, the same invoice costs £208,333 left open. If it rises to 1.3000, it costs £192,308. The forward gives the same £198,728 either way.
What each leaves open
A spot deal now means paying money you may not need yet. A forward means you have committed to the exchange on the agreed date, so a better market rate on that date does not benefit you. Forwards usually need a deposit (margin) held until settlement, and the level depends on the currencies, the length and the provider.
Common questions
Is a forward the same as a prediction? No. The forward rate is set by interest rates, not by a view on the market.
Can the date be flexible? A window forward lets you draw the currency over a period instead of one day. A BLK.FX specialist arranges these. The app does not place trades.
What if I do not need the money after all? The contract still has to be settled, which can create a cost or a gain depending on the market. That is why the amount covered is usually matched to payments that are confirmed.