The outright forward is the simplest type of foreign exchange forward contract. It defines an exchange rate with fixed forward points and a future delivery date.
An outright forward contract allows the purchaser to buy or sell a currency either on a specific date or within a range of dates.
Companies that need to buy goods or services in a different currency overseas can use an outright forward to lock in a favourable exchange rate.
For example, an American company that purchases materials from a Brazilian supplier may be required to provide payment for half of the total value of the goods now and the other fifty percent three months later. The first payment can be covered with a spot trade.
However, if the company wants to lock in the exchange rate, they may do so with a 3-month outright forward, thus reducing their exposure to currency risk. This allows the American company to access the required foreign currency funds at the exchange rate agreed in the forward contract, irrespective of exchange rate fluctuations between the initial and final payment dates.
This sort of forward contract may be useful for businesses with rather simple foreign currency needs or low volumes of payments. For companies with more complex payment schemes or those with ongoing exposure to foreign currencies, however, there are more flexible alternatives like open forwards, which allow them to make partial drawdowns at any time during the life of the contract.