DEFINITION of 'Forward Booking'

Forward booking is a way of trading currency while minimizing the risk of volatile exchange rates. The booking company (risk agents) will write up a contract specifying what the rate of exchange will be, and in doing so will assume the exchange rate risk. The contract will also outline a timeline in which the trade must be made.

The fee associated with the forward book is usually based on a percentage of the amount being traded in the contract.

BREAKING DOWN 'Forward Booking'

Forward booking is primarily used by companies who do not wish to speculate in currencies when making a significant purchase of an offshore asset. By agreeing on a rate the company can easily forecast its expenses and the cost of the asset in local terms to report to stakeholders. 

For example, if Mr. A plans to purchase a big ticket item from Europe in January, and the euro is quite low in December, he may want to forward book in case the euro rises in the next month. The booking company, after making the contract, assuming they do not currency hedge on their end, would hope the euro would fall. However, if it doesn't, they would still have the fee paid for the transaction.

However, there are someone companies who will forward book with a view that it is a favorable time to buy or sell the currency at hand. This is more common in the financial services when a company is buying equites, bonds or commodities, denominated in a foreign currency. 

Those looking to forward book an exchange rate for the purchase of an asset could also hedge by purchasing an option. Using the example above, Mr. A could buy a call option for a set amount of euros. If the euro is higher at the time of expiring then Mr. A would exercise the option, and if it was lower Mr. A would not exercise the option and take advantage of the prevailing forex rate. (For more information on options trading see out Options Tutorial)

  1. Trading Book

    A trading book is the portfolio of financial instruments held ...
  2. Outright Forward

    An outright forward is a forward currency contract that locks ...
  3. Forward Forward

    A forward forward is an agreement between two parties to engage ...
  4. Forward Market

    A forward market is an over-the-counter marketplace that sets ...
  5. Forward Delivery

    Forward delivery is the final stage in a forward contract when ...
  6. Forward Discount

    A forward discount occurs when the expected future price of a ...
Related Articles
  1. Trading

    How To Lock In An Exchange Rate

    Currency risk can be effectively hedged by locking in an exchange rate through the use of currency futures, forwards, options, or exchange-traded funds.
  2. Investing

    What are Options Contracts?

    An explanation of options contracts, call options and put options.
  3. Trading

    Top 7 Books to Learn Technical Analysis

    Here are five of the best books written on technical analysis to help traders and investors understand and apply technical analysis.
  4. Personal Finance

    Top 5 Books to Become a Professional Trader

    For people who want to learn how to trade and invest for themselves, there are a wealth of excellent books on trading available to learn from.
  5. Trading

    The money market hedge: How it works

    Hedge foreign exchange risk using the money market, which includes Treasury bills, bankers’ acceptances and commercial paper.
  6. Trading

    Hedging with currency swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it with currency swaps.
  7. Trading

    How To Avoid Exchange Rate Risk

    What are the best strategies to avoid exchange rate risk when trading?
  8. Personal Finance

    Top 5 Books to Become an Option Trader

    For individuals aspiring to become options traders, here are five of the best books that offer help in understanding and profiting from the options markets.
  9. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  1. How Are Book Value and Intrinsic Value Different?

    Book value and intrinsic value are two ways to measure the value of a company. Find out which is known as the true value ... Read Answer >>
  2. How do I convert a spot rate to a forward rate?

    The spot rate shows the cost of executing a financial transaction today, while the forward rate provides the cost of executing ... Read Answer >>
Trading Center