An outright forward is an agreement between a buyer and seller of a currency to exchange for a specific amount of one currency to another at a predetermined rate of exchange as well as future date. This can be seen as a type of hedging contract, to limit the risk of exchange rate fluctuations that may occur between its two parties. An immediate settlement occurs on the exact date of its terms in that are agreed amongst its parties.

An outright forward contract is a flexible and customizable foreign exchange product. This product can create a specific rate at the outset of trade, called a forward pips. These are then individually negotiated between the two parties and will determine the cost of the forward transaction. As the agreed upon delivery date comes near, the forward points may be reevaluated by the contracting parties in order to use this cost as a deterrent to cancel any further obligations of the transactions.

The total cost associated with an Outright Forward is primarily composed of two costs: the bid-ask spread and the interest rate differential. In an Outright Forward, the bid-ask spread is composed of the difference in the forward and the spot exchange rate. This spread can vary by product and depends on the liquidity of the exchange. The interest rate differential is the difference in the interest rates of the two currencies exchanged.

Outright Forwards are commonly used by investors in international markets, importers and exporters, and as hedging instruments. In international investing, Outright Forwards can mitigate international currency risk. As an importer or exporter, an Outright Forward can help guarantee an exchange rate on a future date that is deemed to be beneficial to the contracting parties. Outright Forwards can also be used to hedge against the foreign exchange risk associated with a currency conversion. By locking in an exchange rate, investors, importers and exporters can protect themselves from any changes in the rate of exchange that may occur.

In conclusion, an Outright Forward is an invaluable tool for investors, importers and exporters looking to protect themselves from exchange rate fluctuations. This contract enables parties to lock in a predetermined rate of exchange, as well as a future date, which allows for increased security and flexibility.