WHAT IT IS
A currency forward is an agreement that locks in the exchange rate for the purchase or sale of a currency on a future date.
WHEN TO USE
1. Investors are concerned about currency fluctuations on the underlying securities held and wish to hedge this exposure
2. Investors feel the currency on the underlying security is grossly under/over valued.
ADVANTAGES
1. Reduces currency risk on foreign securities held
2. Currency overlay boosts returns when effectively applied
3. Allows businesses/investors to lock in foreign exchange rates on future purchases.
RISKS
Rates are locked in which prevents in participation if rates move in the client's favor.
