Forward Contracts for Canadian Businesses
Written by Omer Bozdag, Founder.
A forward contract is an agreement to exchange a set amount of one currency for another at a rate fixed today, for settlement on a future date. Canadian importers, exporters and anyone with a known future payment use forwards to replace an uncertain cost with a known one. This guide explains how they work and what to consider. It is general information, not advice.
Common use cases
- Paying a foreign supplier invoice due in 30 to 180 days.
- Converting expected USD or EUR receivables back to CAD.
- Setting a known cost for a price list or tender quoted in CAD.
- Funding a property purchase or large personal payment with a fixed closing date.
A forward is a binding obligation
Once booked, you are committed to settle the agreed amount on the agreed date, even if the market rate later moves in your favour or the underlying deal changes. Closing or changing a forward early may result in a gain or loss based on market rates at the time.
Forward points
The forward rate is not a prediction. It is the spot rate adjusted by forward points, which mainly reflect the interest rate difference between the two currencies over the contract period. When Canadian rates are lower than US rates, for example, the forward rate to buy USD is usually slightly higher than spot.
Deposits and collateral
Providers may ask for an initial deposit, often a percentage of the contract value, and may request additional funds (a margin call) if the market moves significantly against the open position. Terms depend on the provider and your credit profile, so confirm them before booking.
Opportunity cost
A forward removes downside risk and also removes upside. If the currency moves in your favour, you still settle at the contracted rate. Many businesses hedge only part of an exposure for this reason.
Settlement
On the value date you send the contracted amount of one currency and receive the other, or pay the beneficiary directly. Some providers allow drawdowns before maturity on flexible or window forwards.
Illustrative example
Illustrative only. A manufacturer owes EUR 50,000 in 90 days. It books a forward at a rate that fixes the CAD cost today. On the value date it pays the agreed CAD amount regardless of where EUR/CAD trades. If the euro strengthened, the forward protected the budget. If it weakened, the business paid more than it would have at spot. Figures are hypothetical.
Frequently asked questions
Can I cancel a forward contract?
A forward is binding. It can sometimes be closed out early, but the difference between the contracted rate and the current market rate is settled as a gain or loss.
How far ahead can I book?
Terms vary by provider and currency. Many businesses book between one and twelve months ahead. Ask your dealer what is available for your pair.
Does a forward guarantee the best rate?
No. It guarantees a known rate. The market may end up better or worse than the contracted rate.
Sources
- Bank of Canada: Policy interest rate
- Export Development Canada (EDC): Managing foreign exchange risk
- Bank of Canada: Daily exchange rates
CurrencyMate educational content is written or reviewed by Omer Bozdag. It is general information, not personalised financial advice. We cite primary sources where claims are made and update pages when facts change.