You know what exchange rate you're getting today. But what about the payment due in ninety days?

Episode 9 opens Part Three of The Trading Floor — forward contracts. The instruments that let corporations, investors, and institutions lock in a future exchange rate today. David Axtell explains them the way he'd explain them to a new colleague on the desk: from the ground up, with no shortcuts and no jargon without context.

He starts with the problem. A European manufacturer importing raw materials from the United States has a ten million euro payment due in three months. At today's spot rate of 1.0850, that costs ten million eight hundred fifty thousand dollars. But if EUR/USD moves to 1.1200 over those ninety days, the same payment costs three hundred fifty thousand dollars more. Margin gone. Project unprofitable. That's the risk a forward contract eliminates.

David walks through the five essential terms that define every forward contract — currency pair, notional amount, forward rate, value date, and settlement method — explaining why each matters and what happens when any of them goes wrong. He covers the critical distinction between physical delivery and cash settlement, and why the choice between them has real operational and credit implications.

The episode explores the fundamental difference between forwards and options: obligation versus optionality. A forward locks you in. If the market moves in your favour after you've hedged, you don't benefit. David's line captures it perfectly — "That's not a loss. That's the cost of certainty." It's a mindset shift that separates professional hedgers from those who treat treasury like a trading desk.

He also covers value date conventions, broken dates, standard tenors, and the settlement mechanics that turn a contractual agreement into actual currency flows through correspondent banking networks.

This is Part Three of a twenty-episode series covering the complete landscape of FX cash products, from spot through forwards, swaps, and non-deliverable forwards.

Next Episode: Forward Pricing — interest rate parity, forward points, and why forward rates are determined by interest rate differentials, not market forecasts.

Based on: Chapter 7 of FX Cash Products by Luigi Rondanini and David Axtell, forthcoming from Rondanini Publishing.