Forward window contract definition
/What is a Forward Window Contract?
A forward window contract is a contract under which an entity agrees to purchase a fixed amount of a foreign currency within a range of settlement dates, and at a predetermined rate. The purchase can be made on any date within the window. This contract is slightly more expensive than a standard forward exchange contract, but makes it much easier to match incoming customer payments to the terms of the contract.
Example of a Forward Window Contract
For example, a customer should pay an American company 60,000 Euros in 60 days, so the American company wants to hedge it with a forward exchange contract to sell 60,000 Euros to a bank in 60 days at an exchange rate of 1 Euro per 1 U.S. Dollar. However, the customer may not pay in precisely 60 days, so the American company enters into a forward window contract; this gives it a broader span of time over which to pay the 60,000 Euros to the bank.
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FAQs
What Risks are Associated with Forward Window Contracts?
Forward window contracts carry the risk of opportunity loss if currency rates move favorably after the contract is locked in, since the company is committed to the agreed rate. They may also expose the business to liquidity issues if the anticipated foreign currency payments do not occur within the contract window. Additionally, counterparty risk exists if the financial institution fails to honor the agreement.