Companies that pay or receive foreign currency for imports or exports enter into FX forwards with banks to fix the yen amount1.

Fixing a future exchange of foreign currency and yen today

An FX forward is a bilateral contract between a customer and a bank that fixes, today, the rate at which a foreign currency will be exchanged on a set future date or within a set period2. Fixing future terms today is the same idea as a forward contract. Forwards in general are covered in Forwards and Futures.

Consider a fictional example. Company A imports goods from Company C in the United States and must pay 1 million US dollars for them in 6 months. Today's spot exchange rate is 150.00 yen per dollar. The spot exchange rate is the rate for a trade in which the funds are exchanged on the second business day after the trade is agreed3. Company A enters into an FX forward with Bank J to buy USD 1 million in 6 months at 148.00 yen per dollar.

On this page, the delivery date is the day the forward is executed and the foreign currency and yen change hands, and the contract rate is the rate that the customer and the bank agreed in the forward. The contract rate in the example is 148.00 yen.

Bank JCounterpartyCompany AImporterCompany CUS seller148M yen1M dollars1M dollars
Figure 1Exchanges among Company A, Bank J, and Company C on the delivery date
Figure description

On the delivery date in 6 months, Company A pays Bank J 148 million yen and receives USD 1 million from Bank J. Company A then pays the USD 1 million to Company C for the imported goods. No money moves between any of the parties from the day the forward is agreed until the delivery date. Whatever the spot exchange rate is on the delivery date, Company A pays 148 million yen.

Gains and losses against the spot exchange rate on the delivery date

With the FX forward, Company A's payment is fixed at 148 million yen regardless of the spot exchange rate on the delivery date. Compared with buying dollars at the spot exchange rate on the delivery date without a forward, the gains and losses are as follows.

Spot exchange rate on the delivery date (per dollar) Payment without the forward Payment with the forward Gain or loss from the forward
160.00 yen 160 million yen 148 million yen +12 million yen
148.00 yen 148 million yen 148 million yen 0 yen
135.00 yen 135 million yen 148 million yen −13 million yen

If the yen weakens to 160.00 yen per dollar, Company A pays 12 million yen less than it would without the forward. If the yen strengthens to 135.00 yen per dollar, it pays 13 million yen more than it would without the forward. In both cases, Company A's payment for the imports, combining the purchase and the forward, is fixed at 148 million yen, so currency risk no longer makes the payment go up or down1.

On the delivery date, Bank J delivers USD 1 million to Company A and receives 148 million yen. An exporter does the opposite of an importer: it enters into a forward to sell dollars, to fix the yen amount of the dollars it expects to receive1.

How the contract rate is set

Company A's contract rate of 148.00 yen is set by the interest rate differential between the dollar and the yen, Bank J's margin, and other factors4. As of August 2011, a dollar-denominated forward had no other direct costs, such as fees4.

The rate used for a trade in which the funds are not exchanged on the second business day after the trade is agreed, like the FX forward in the example, is called the forward exchange rate. The forward exchange rate is set by the interest rates of the two currencies for the period until delivery. When dollar interest rates are higher than yen interest rates, the forward exchange rate shows a stronger yen than the spot exchange rate3. The contract rate in the example shows a stronger yen than today's spot exchange rate of 150.00 yen because the example assumes that dollar interest rates are higher than yen interest rates. Covered Interest Parity and FX Forward Points covers how to calculate the difference between the forward and spot exchange rates (forward points) from interest rates.

Choosing the delivery date

There are two ways to set the delivery date: fixed-date delivery, which sets a single date, and period delivery, which allows delivery within a period2. Fixed-date delivery sets one execution date, such as "delivery on July 11" (our translation). It is used when the date of the foreign-currency payment or receipt is known in advance, such as the day a bank buys an export bill or the day a foreign-currency deposit matures5.

Period delivery is used when the settlement date of the payment cannot be pinned down to one day, or when the funds are expected to arrive a few days early or late. Under calendar-month delivery, set by calendar month as in "April delivery" (our translation), the forward can be executed on any bank business day from the first to the last day of that month. There is also specified-period delivery, which sets any period, even one that runs from one month into the next6.

Another way is to start the period on the settlement date of a spot trade agreed on the day the forward is agreed (generally the second business day after the trade), and to run it for one month from there. Under period delivery, the forward can also be executed in several parts within the period, as long as each part is a trade in the same direction, either for exports or for imports6.

Why a forward is hard to cancel and why the bank screens the customer

Although it is called yoyaku ("reservation") in Japanese, the agreement for foreign exchange transactions with the bank defines it as a purchase and sale. In principle, it cannot be canceled, and the customer is obliged to exchange the currencies on the delivery date. Even if the spot exchange rate on the delivery date is more favorable than the contract rate, the customer cannot cancel the forward for that reason7. The rule is to use the full contracted amount on the set date or within the set period, and any amount left unused goes through a cancellation procedure. Changing the date while keeping the contract rate is generally not allowed. The bank may agree to a cancellation or an extension when there is an unavoidable reason, such as a war or a port strike8.

Before entering into a forward, the bank checks whether the customer will be able to perform it. If the customer cannot perform the forward because of bankruptcy or a similar event, the bank may be unable to recover from the customer its loss, which is the difference between the contract rate and the market rate at that time. For this reason, the bank treats the forward as credit extended to the customer9.

Differences from currency options

Besides FX forwards, a currency option is another way to prepare for exchange rate movements. An importer that holds the right to buy dollars can choose not to exercise the right if the spot exchange rate at expiry shows a stronger yen than the strike price, which makes buying dollars in the market cheaper. The buyer pays a premium for this right when the contract is made. An FX forward has no such choice and no premium10.

For buying dollars, comparing an FX forward with the buyer of the right to buy dollars (a USD call) gives the following.

Item FX forward Currency option (long USD call)
Delivery at expiry Obligation (generally cannot be canceled) Right (can exercise or abandon)
Payment when the contract is made None Premium
If the yen weakens Can buy dollars at the contract rate Can buy dollars at the strike price
If the yen strengthens Buy dollars at the contract rate Can abandon and buy dollars at the spot rate

Notes

  1. Japan External Trade Organization (JETRO), "外国為替取引における先物予約と通貨オプションの違い" (Differences between forward contracts and currency options in foreign exchange transactions, research as of August 2011, last updated July 2025, in Japanese), "Ⅲ. 実務面における両者の使い分け" (III. How the two are used in practice). ↩ ↩2 ↩3

  2. JETRO, "先物為替予約の種類と利用にあたっての留意点：日本" (Types of forward exchange contracts and points to note in using them: Japan, research as of September 2011, last updated July 2025, in Japanese), first paragraph of the answer. ↩ ↩2

  3. Bank of Japan, "「外国為替市況」の解説" (Explanation of the "Foreign Exchange Market Rates", January 2023, in Japanese), "1. スポット・レート" (1. Spot rate), and "1. 3ヶ月フォワード・スプレッド" (1. Three-month forward spread) under "（参考）「時系列統計データ検索サイト」に過去計数のみ掲載の項目" (Reference: items published only as past data on the Time-Series Data Search Site). ↩ ↩2

  4. JETRO, "外国為替取引における先物予約と通貨オプションの違い" (in Japanese), "Ⅱ. 取引コスト・取引採算" (II. Transaction costs and profitability). ↩ ↩2

  5. JETRO, "先物為替予約の種類と利用にあたっての留意点：日本" (in Japanese), "「確定日渡し」の特徴" (Features of fixed-date delivery) under "I. 「確定日渡し」と「期間渡し」の特徴" (I. Features of fixed-date delivery and period delivery). ↩

  6. JETRO, "先物為替予約の種類と利用にあたっての留意点：日本" (in Japanese), "「期間渡し」の特徴" (Features of period delivery) under "I. 「確定日渡し」と「期間渡し」の特徴" (I. Features of fixed-date delivery and period delivery). ↩ ↩2

  7. JETRO, "外国為替取引における先物予約と通貨オプションの違い" (in Japanese), first paragraph of the answer and "Ⅰ. 通貨オプション取引" (I. Currency option transactions). ↩

  8. JETRO, "先物為替予約の種類と利用にあたっての留意点：日本" (in Japanese), "予約の取消と期日変更" (Cancellation and date changes of forwards) under "II. 先物為替予約の留意点" (II. Points to note about forward exchange contracts), research as of September 2011. ↩

  9. JETRO, "先物為替予約の種類と利用にあたっての留意点：日本" (in Japanese), "事前審査" (Advance screening) under "II. 先物為替予約の留意点" (II. Points to note about forward exchange contracts), research as of September 2011. ↩

  10. JETRO, "外国為替取引における先物予約と通貨オプションの違い" (in Japanese), "Ⅰ. 通貨オプション取引" (I. Currency option transactions) and "Ⅱ. 取引コスト・取引採算" (II. Transaction costs and profitability). ↩