What Is Short Date Forward?
A short date forward is a forward exchange contract involving two parties that agree upon a set price to sell or buy an asset at a pre-determined date and time in the future. A short date forward typically involves trading a currency at a specified spot date that is before the normal spot date, ranging from one week to one month after the trade date.
A short dated forward can be contrasted with a long dated forward, a type of forward contract commonly used in foreign currency transactions with a settlement date longer than one year away and as far as 10 or more years. Companies or financial institutions use both types of these contracts to hedge certain currency exposures.
How a Short Date Forward Works
Investors can use short date forward contracts to hedge risks or as a speculative investment vehicle. The matured value of a forward contract can be calculated by the difference between the delivery price and the underlying price of the security on that date.
A forward exchange contract is an agreement to exchange some underlying security or asset at a pre-specified future date, such as the currencies of different countries at a specified exchange rate (the forward rate). Typically, forward contracts call for delivery (either physical or cash delivery) on a date beyond the spot contract settlement.
Unlike futures contracts, which are standardized and traded on exchanges, forward contracts do not take place on regulated exchanges and do not involve delivery of standard currency amounts. They are said to trade over-the-counter (OTC). The terms and specifications of a particular forward contract are negotiated and agreed upon by the counterparties involved, and can be cancelled only with consent of the other party to a trade.
A forward contract allows a trader, bank, or a bank’s customer, to arrange for delivery (or sale) of a specific amount of currency on a specified future date, at the current market price. This protects the buyer against the risk of fluctuating rates when acquiring foreign exchange needed to meet future obligations.
In contrast to a typical forward contract, short date forwards will involve delivering a currency on a spot date that is before the normal spot date, ranging from one week to one month after the trade takes place. These short-term contracts may be put in place as a stop-gap hedge when listed futures contracts do not exist for the needed contract month, or if they expire too soon or later than is needed for a perfect hedge.