Get $50,000 in potential benefits Register nowGet $50,000 in potential benefits Register nowGLOBAL SELLING BLOG
What is a Forward Contract? Meaning, Types, and Benefits for Exporters
A forward contract is an agreement between two parties to buy or sell an asset at a specified price on a future date. Learn its advantages and users for exporters.
June 03, 2026 | 5 min read
Ready to start exporting from India?
All commodities, whether crude oil or consumables, go through price fluctuations. The prices of these commodities can vary widely, and this uncertainty can impact businesses and their operations. Many businesses use a financial derivative known as a forward contract agreement to avoid or mitigate these risks.
What is a forward contract against export?
A forward contract is a private deal between two parties. You agree on a price today for a transaction that will happen on a specific future date, called the maturity date. The forward contract tells you exactly what you'll receive, giving you price certainty, regardless of how markets move between now and then.
These contracts are bilateral agreements and no stock exchange or clearinghouse is involved. You negotiate directly with the other party, usually through your bank, in what's called the OTC (over-the-counter) market. This also means the contract can be customized to your amount, your currency, your date.
For Indian exporters, the most common use is hedging against currency risk. A sudden rupee appreciation won’t affect your dollar payment 90 days from now.
These contracts are bilateral agreements and no stock exchange or clearinghouse is involved. You negotiate directly with the other party, usually through your bank, in what's called the OTC (over-the-counter) market. This also means the contract can be customized to your amount, your currency, your date.
For Indian exporters, the most common use is hedging against currency risk. A sudden rupee appreciation won’t affect your dollar payment 90 days from now.
What are forward contracts used for?
Forward contracts are used for various purposes, including:
For hedging investments:
One of the most common uses of forward contracts is for hedging investments. When a company invests in a product that is subject to price volatility, it can use these contracts to lock in a predetermined price for a future date.
Changing contract terms:
Open forward contracts, also known as flexible contracts, allow parties involved to change contract terms during the contract period. This type of contract is ideal when there is uncertainty about the delivery date or the quantity of a commodity that might be needed.
With market orders:
When using these contracts with market orders, parties involved agree to buy or sell the commodity at a future date at the best available market price.
Commodity price hedging:
Indian exporters who deal in physical goods use forward contracts to fix prices in advance. A spice exporter might lock in a price for pepper six months before delivery. If pepper prices drop sharply by the time the deal closes, the exporter still receives the agreed price.
Interest rate hedging:
Companies with variable-rate loans face a real risk: if interest rates rise, their borrowing costs go up with them. To manage this, businesses use Forward Rate Agreements (FRAs) to fix the interest rate on a future loan or deposit.1
How do forward contracts work?
Exchange rate movements can influence the final cost of international shipping, and forward contracts help reduce it.
Here's the basic flow using an illustrative example:
Here's the basic flow using an illustrative example:
Step 1: You know you'll receive USD 1,00,000 in 90 days.
Step 2: You contact your Authorized Dealer bank and request a forward rate quote for your currency pair and tenor.
Step 3: You and the bank agree on a rate, say ₹83.50 per USD for delivery in 90 days. No money moves yet.
Step 4: You complete your export, ship the goods, and receive payment from your buyer on the agreed date.
Step 5: On the maturity date, you deliver the USD to your bank and receive INR at ₹83.50 as agreed, regardless of the market rate that day.
Forward contracts are traded over-the-counter (OTC). This makes them highly customizable, but without a central clearinghouse watching over the deal.2
Features of a forward contract
Here are some of the essential features of these contracts:
Non-standardized
Unlike futures contracts, these are not regulated by any third-party authority. The terms and conditions depend solely on the agreement between the two parties.
Not regulated
These contracts are not standardized, which means that each contract is customized according to the needs and requirements of both parties.
Bilateral
This contract is a bilateral agreement between two parties, which means that both parties have to fulfil their obligations on the date of maturity.
Tailor-made
Since each contract is unique, parties involved can tailor the terms and conditions of the contract according to their specific needs.
No public disclosure
The price of these contracts is not publicly available, making it difficult for other market participants to know the price at which the contract was signed.
Settlement on maturity
Unlike futures contracts, which are marked-to-market daily, these contracts are settled on maturity.
No margin requirement
These contracts do not require any margin payment, so the parties involved do not have to deposit any upfront payment.
Types of forward contracts
The following are some common types of forward contracts:
Closed outright forward
It involves two parties agreeing to exchange currencies at a particular future date by locking in an exchange rate.
Flexible forward
A flexible forward contract is an agreement between two parties to exchange currencies at a future date, just like a closed-outward forward. However, it allows the parties to exchange funds before the settlement date, often in parts, as long as the entire amount is settled by the due date.
Long-dated forward
In the long-dated contract, the settlement period extends over more than a year. Most of these contracts are short-term contracts, which is what differentiates long-dated contracts from the rest.
Non-deliverable forward
The non-deliverable forward is a type of forward contract that does not involve the physical exchange of a commodity, asset, or currency. Instead, the parties only exchange the difference between the contract and spot rates at maturity.3
Advantages of a forward contract
Here are some advantages of forward contracts:
Customizable
Commodity forward contracts allow parties to agree on specific terms and conditions that meet their unique requirements, like quantity, price, and delivery date.
Lower international trade-related risks
International trade carries many risks, including currency fluctuations, political risks, and legal or regulatory environment changes. Forward contracts can help businesses mitigate these risks by providing certainty around the cost of exports.
No upfront hedging costs
Another advantage of commodity forward contracts is that they do not require any upfront costs for hedging. Unlike options, which require a premium payment, these contracts do not require businesses to pay anything upfront.
Cash flow certainty
When you know exactly how much money is coming in or going out on a specific date, planning becomes much easier. The advantage of forward contracts is that they make receivables and payables more predictable.
Available for long tenors
Forward contracts can be used for long durations. In India, currency forward contracts are typically available for tenors of one year or longer. This makes them useful for businesses with long project cycles or multi-month supply agreements.4
Disadvantages of forward contracts
Some of the main disadvantages are:
Non-regularized
One of the major risks or limitations of these contracts is that they are not standardized, and there is little public information available about the market cap. This lack of regulation can make it difficult for investors to assess these types of contracts’ risks.
Prone to counterparty risks
Since these contracts are bilateral agreements between two parties, there is always a risk that one party may default on their obligations.
Possible miscalculation of movement of prices
These contracts are useful for hedging against future price movements. However, they can also expose companies to risks and potential losses in a highly volatile market. If a company miscalculates the movement of prices, it may end up locked into an unfavourable contract and lose out on potential gains.
Opportunity cost
Locking in a rate means you're protected from downside, but you're also cut off from upside. For example, if you lock in a USD vs INR rate of ₹84 and the rupee depreciates to ₹88 by the time your payment arrives, you still receive ₹84. Exchange rate movement is just one of the risks involved in export but it's among the most predictable and manageable with the right tools.
Illiquidity
Forward contracts are private agreements. If your export order gets cancelled or delayed, you're still bound by the contract. Exiting early typically requires cancelling and rebooking, which may involve swap costs and depends entirely on what your bank agrees to.5
Applications of a forward contract
The main types of forward contracts show up across different industries. Understanding each type helps you identify which one is relevant to your business.
Currency forwards
The most common application for Indian exporters. A currency forward lets you lock in an exchange rate for a future foreign currency payment or receipt. If you're exporting goods to a US buyer and expecting payment in dollars 90 days from now, a currency forward protects you from rupee appreciation eating into your INR revenue.
Commodity forwards
Used by producers, traders, and manufacturers who deal in physical goods. A coffee estate, for instance, can agree to supply 10,000 kg of coffee at a fixed price three months ahead, removing the risk of a price drop before delivery.
Interest rate forwards (Forward Rate Agreements / FRAs)
FRAs fix the interest rate on a future borrowing or deposit. A company that plans to take a loan six months from now can use an FRA to lock in the rate today. If rates rise in the meantime, the FRA compensates for the difference. This keeps borrowing costs predictable.
Equity forwards
Less common for exporters, but used by institutional investors and fund managers. An equity forward is an agreement to buy or sell a stock or index at a fixed price on a future date. These are typically used for large portfolio hedges or structured investment strategies.
How are forward contracts calculated?
Here’s a step-by-step guide to calculating contracts:
Step 1: Determine the currency pair
Before calculating the forward contract, it is essential to determine the two currencies involved in the transaction.
Step 2: Determine the spot rate
The spot rate refers to the current exchange rate between the two currencies. The system adjusts the market spot rate when calculating the forward rate.
Step 3: Calculate the forward points
The forward points are usually determined by the difference between the interest rates of these currencies in the pair and the time to maturity of the contract.
Step 4: Add the forward points to the spot rate
A valid VAT number signals compliance and professionalism, particularly in B2B markets where buyers need valid VAT invoices to reclaim their own input tax.8
Step 5: Agree on the total amount and exchange rate
After calculating the forward rate, agree on the total amount of the trade and the exchange rate.
Step 6: Agree on a binding contract
Once the currencies are paired, the total amount the business wishes to trade and the agreed exchange rate have been determined; a binding contract is automatically agreed upon.
Forward contracts are an effective tool to manage risks in commodity and currency trading. They provide businesses with price certainty, customization, and flexibility.
Forward contracts are an effective tool to manage risks in commodity and currency trading. They provide businesses with price certainty, customization, and flexibility.
Forward contract example
Here’s a forward contract example to show how this works, for both currency and commodity exposures.
Example 1 – Currency forward
An Indian apparel exporter has shipped goods worth USD 1,00,000 to a US buyer. Payment is due in 90 days. The spot rate today is ₹84 per USD. The exporter is worried the rupee may appreciate by the time payment arrives. This would mean fewer rupees when the dollars are converted.
To protect against this, the exporter books a currency forward with their bank at ₹83.50 per USD for delivery in 90 days.
To protect against this, the exporter books a currency forward with their bank at ₹83.50 per USD for delivery in 90 days.
Scenarios
Without a forward contract
With a forward contract
Scenario A – Rupee appreciates to ₹81
Exporter receives ₹81,00,000
Exporter receives ₹83,50,000 (saving ₹2,50,000)
Scenario B – Rupee depreciates to ₹87
Exporter would receive ₹87,00,000
Exporter receives ₹83,50,000 (opportunity cost of ₹3,50,000)
Scenario A is why exporters use forward contracts. Scenario B shows the opportunity cost, or the upside you give up in exchange for certainty. For most businesses, that trade-off is worth it.
Example 2 – Commodity forward
A coffee estate in Coorg agrees to supply 10,000 kg of coffee to an exporter at ₹500/kg, three months from today. Today's market price is ₹500/kg, but the estate is worried prices could fall to ₹450/kg before delivery.
By signing a forward contract at ₹500/kg, the estate locks in revenue of ₹50,00,000. If prices do fall to ₹450/kg, the estate is protected. If prices rise to ₹550/kg, the estate misses that upside, which is again the opportunity cost of hedging.
By signing a forward contract at ₹500/kg, the estate locks in revenue of ₹50,00,000. If prices do fall to ₹450/kg, the estate is protected. If prices rise to ₹550/kg, the estate misses that upside, which is again the opportunity cost of hedging.
These examples are for representation only and do not represent cost estimations on the part of Amazon Global Selling India.
Difference between a forward contract and a futures contract
The difference between forward and future contracts comes down to one core distinction: forwards are private and customizable, futures are standardized and exchange-traded.
Both allow you to lock a price for a future transaction, but how they work and who they work for is quite different.
Both allow you to lock a price for a future transaction, but how they work and who they work for is quite different.
Parameter
Forward contract
Futures contract
Where it's traded
Over-the-counter (OTC), like a private deal between two parties
On a regulated exchange (like NSE)6
Standardization
Fully customizable
Standardized
Counterparty risk
High. No exchange or clearinghouse guarantees the deal
Low. Exchange acts as a guarantor through daily margin settlement
Settlement
At maturity only
Mark-to-market daily with final settlement at expiry
Liquidity
Low
High
Margin requirement
Not required and agreed upon privately
Required with initial and maintenance margins apply
Regulation
Less regulated
Strictly regulated by SEBI (in India) under Derivatives7
Typical users
Exporters, importers, corporates hedging specific exposures
Traders, investors, institutional hedgers
Flexibility
High
Low
For Indian exporters managing a specific shipment or a known payment date, a forward contract is more practical. Futures work better for traders or institutions that need liquidity and the ability to exit positions quickly.
Forward contracts and RBI regulations for Indian exporters
A forward exchange contract is a specific type of forward contract that focuses exclusively on currency. In India, the Reserve Bank of India governs their use under the Foreign Exchange Management Act (FEMA), 1999.8 Meanwhile, the Foreign Exchange Dealers Association of India (FEDAI) sets the operational rules and standard guidelines that banks follow.9
Who can book a forward contract?
Forward contracts are one of the most practical risk management tools available in international trade. Indian exporters with foreign currency exposure or companies with foreign currency loans can book forward contracts through Authorized Dealer Category I banks.10
Booking without documentation
As a facilitation measure, the AD category I banks allow individuals, firms, and companies to book forward contracts up to USD 100,000 without submitting underlying documents, based on a simple self-declaration.11 This makes it easier for smaller exporters and SMEs to hedge without extensive paperwork.
Cancellation and rebooking
Forward contracts for export transactions can be cancelled and rebooked freely at the current market rate. For import and non-trade transactions, rebooking is allowed after cancellation, but only up to the value of the unhedged exposure due within one year.
When a contract is extended or rolled over, it is first cancelled at the prevailing rate and then rebooked. The difference between the original contract rate and the cancellation rate is either paid to or recovered from the customer.12
When a contract is extended or rolled over, it is first cancelled at the prevailing rate and then rebooked. The difference between the original contract rate and the cancellation rate is either paid to or recovered from the customer.12
FEDAI rules on maturity and cancellation
Under FEDAI's rules, it is the customer's responsibility to either deliver on the contract or request an extension or cancellation before the maturity date.
If a contract matures without any instruction from the customer, it is automatically cancelled 15 days from the maturity date.13 Banks charge a minimum fee for each cancellation request, and swap costs may apply for early delivery.
If a contract matures without any instruction from the customer, it is automatically cancelled 15 days from the maturity date.13 Banks charge a minimum fee for each cancellation request, and swap costs may apply for early delivery.
Pro tip
Always book your forward contract through your existing AD bank. If you're new to hedging, ask your bank's treasury desk to walk you through the rates and swap costs before committing.
Amazon Global Selling: Easy e-commerce exports and hassle-free shipping
If you are a business owner and you want to sell your products to the world, Amazon Global Selling enables you to list and sell ‘Made in India’ products on 18 Amazon global marketplaces. As an e-commerce export program, Amazon Global Selling provides support and guidance at every step of your export journey, connecting you to Amazon’s Service Provider Network for tailored compliance, payments, and logistics support.
Registered sellers can choose to ship their products by themselves through Merchant Fulfilled Network (MFN) or they can opt for Fulfillment by Amazon (FBA) and outsource order fulfillment to Amazon including packing, storage, delivery, and returns. Amazon Global Selling simplifies the process of international shipping to the world, helping businesses navigate customs and reach a vast audience.
Registered sellers can choose to ship their products by themselves through Merchant Fulfilled Network (MFN) or they can opt for Fulfillment by Amazon (FBA) and outsource order fulfillment to Amazon including packing, storage, delivery, and returns. Amazon Global Selling simplifies the process of international shipping to the world, helping businesses navigate customs and reach a vast audience.
Frequently Asked Questions
What are the trading principles of a forward contract?
Forward contracts are based on three principles: mutual agreement on price and date, obligation to fulfill the contract on maturity, and no exchange of money at the time of signing. Both parties are legally bound to complete the transaction at the agreed rate on the maturity date.
What is a non-deliverable forward contract (NDF)?
An NDF is a forward contract where no physical delivery of currency takes place. Instead, the difference between the agreed forward rate and the actual spot rate on the settlement date is paid in a convertible currency, usually USD.
What is the difference between a forward contract and hedging?
Hedging means protecting yourself against exchange rate fluctuations. So, hedging is the strategy, and a forward contract is one of the tools used to execute it.
What are the risks involved with forward contracts?
The main risks are counterparty risk, opportunity cost, and illiquidity. For exporters, there's also the risk of the underlying transaction falling through. If your shipment is cancelled, you're still bound by the contract.
What is the difference between a forward contract and a futures contract?
A forward contract is a customized agreement that allows buying or selling an asset at a pre-decided price and date in the future. A futures contract is a standardized agreement traded on an exchange that obligates both parties to buy or sell the asset at a pre-decided price and on a particular date in the future.
What is the difference between a forward contract and a spot contract?
A forward contract is made between two parties to buy or sell commodities at a pre-decided price and date in the future. On the other hand, a spot contract allows buying or selling an asset at its current market price and settling the transaction immediately.
Can forward contracts be cancelled?
The terms for cancellation are usually agreed upon when the contract is created. It’s important to carefully review the contract and understand the cancellation terms before deciding.
Are forward contracts regulated?
Financial authorities do not heavily regulate these contracts as they are privately negotiated agreements between two parties.
What is a forward contract in foreign exchange?
A forward contract in foreign exchange is made between two parties, like an importer and exporter, to purchase or sell a currency at an agreed-upon exchange rate and on a future date.
Published on August 30, 2023.
Updated on June 3, 2026.
Sources:
1. https://corporatefinanceinstitute.com/resources/derivatives/forward-contract/
2. https://corporatefinanceinstitute.com/resources/derivatives/forward-contract/
3. https://scripbox.com/pf/forward-contract/
4. https://www.rbi.org.in/commonman/Upload/English/Notification/PDFs/14MRA010710_F.pdf
5. https://www.eximguru.com/exim/reserve-bank/fedai-rules/rules-8-early-delivery-extension-and-cancellation-of-forward.aspx
6. https://www.nseindia.com/static/market-data/securities-information-contracts-available-for-trading
7. https://www.sebi.gov.in/sebi_data/faqfiles/jan-2017/1485846339758.pdf
8. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13358&Mode=0
9. https://www.investopedia.com/terms/f/fedai.asp
10. https://www.rbi.org.in/commonman/Upload/English/Notification/PDFs/14MRA010710_F.pdf
11. https://www.rbi.org.in/commonman/Upload/English/Notification/PDFs/14MRA010710_F.pdf
12. https://www.eximguru.com/exim/reserve-bank/fedai-rules/rules-8-early-delivery-extension-and-cancellation-of-forward.aspx
13. https://www.eximguru.com/exim/reserve-bank/fedai-rules/rules-8-early-delivery-extension-and-cancellation-of-forward.aspx
Updated on June 3, 2026.
Sources:
1. https://corporatefinanceinstitute.com/resources/derivatives/forward-contract/
2. https://corporatefinanceinstitute.com/resources/derivatives/forward-contract/
3. https://scripbox.com/pf/forward-contract/
4. https://www.rbi.org.in/commonman/Upload/English/Notification/PDFs/14MRA010710_F.pdf
5. https://www.eximguru.com/exim/reserve-bank/fedai-rules/rules-8-early-delivery-extension-and-cancellation-of-forward.aspx
6. https://www.nseindia.com/static/market-data/securities-information-contracts-available-for-trading
7. https://www.sebi.gov.in/sebi_data/faqfiles/jan-2017/1485846339758.pdf
8. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13358&Mode=0
9. https://www.investopedia.com/terms/f/fedai.asp
10. https://www.rbi.org.in/commonman/Upload/English/Notification/PDFs/14MRA010710_F.pdf
11. https://www.rbi.org.in/commonman/Upload/English/Notification/PDFs/14MRA010710_F.pdf
12. https://www.eximguru.com/exim/reserve-bank/fedai-rules/rules-8-early-delivery-extension-and-cancellation-of-forward.aspx
13. https://www.eximguru.com/exim/reserve-bank/fedai-rules/rules-8-early-delivery-extension-and-cancellation-of-forward.aspx
Sell across the world with Amazon Global Selling
Ready to start exporting from India?
Want to learn about Amazon Global Selling?
Disclaimer: Whilst Amazon Seller Services Private Limited ("Amazon") has used reasonable endeavours in compiling the information provided, Amazon provides no assurance as to its accuracy, completeness or usefulness or that such information is error-free. In certain cases, the blog is provided by a third-party seller and is made available on an "as-is" basis. Amazon hereby disclaims any and all liability and assumes no responsibility whatsoever for consequences resulting from use of such information. Information provided may be changed or updated at any time, without any prior notice. You agree to use the information, at your own risk and expressly waive any and all claims, rights of action and/or remedies (under law or otherwise) that you may have against Amazon arising out of or in connection with the use of such information. Any copying, redistribution or republication of the information, or any portion thereof, without prior written consent of Amazon is strictly prohibited.
© 2024 Amazon.com, Inc. or its affiliates. All rights reserved
