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A swap is a contractual agreement in which two parties agree to exchange (or swap) cash flows. The cash flows in a swap are based on an underlying financial instrument, such as an interest-bearing debt or a currency. The most common type of swap is an interest-rate swap.

Key Takeaways Currency futures are futures contracts for currencies that specify the price of exchanging one currency for another at a future date. The rate for currency futures contracts is derived from spot rates of the currency pair.

Currency exchange works by letting you convert one currency, like dollars, to another, like euros.

Negotiate the price You can use different methods to determine the price, such as fixed price, adjustable price, or index price. A fixed price means that you agree on a specific amount of money in the chosen currency, regardless of any changes in the exchange rate.

Recall that a swap is a derivative contract between two counterparties to exchange a series of future cash flows. In comparison, a forward contract is also an agreement between two counterparties to exchange a single cash flow at a later date.

What Is a Currency Forward? A currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date. A currency forward is essentially a customizable hedging tool that does not involve an upfront margin payment.

Currency swaps are financial contracts between two parties to exchange a specific amount of one currency for an equivalent amount of another currency. The purpose of currency swaps is to reduce currency risk, achieve lower financing costs, or gain access to a foreign currency.

Lesson Summary. Forward exchange contracts (FECs) are agreements between two parties to exchange currencies at a predetermined rate, amount, and time. Forward contracts are executed or transacted on a future date, using known amounts and the pre-agreed exchange rate known as the forward exchange rate.