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Forward Exchange Contract (FEC): Definition, Formula & Example

What Is a Forward Exchange Contract (FEC)? A forward exchange contract (FEC) is a special over-the-counter (OTC) foreign currency (forex) transaction that allows traders to exchange currencies that are infrequently traded. These may include minor currencies as well as blocked or otherwise inconvertible currencies. Forward contracts are agreements between two parties to exchange a pair of currencies at a specific time in the future. These transactions typically take place on a date after the spot contract settles and are used to protect the buyer from currency price fluctuations.Key TakeawaysA forward exchange contract is an agreement between two parties to effect a currency transaction, and may involve a currency pair not readily accessible on forex markets.FECs are traded OTC with customizable terms and conditions.FECs are used as a hedge against risk since they protect both parties from unexpected or adverse movements in the currencies’ future spot rates. Formula and Calculation of F…