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Chapter 5. Forex Trading Vehicles > Forwards and Futures

Forwards and Futures

A forward is a trade in which the delivery of the currency is set for a specific date in the future. Typical forward contracts are one, two, three, six, or 12 months in length.

Traders sometimes use forwards to take advantage of the difference between interest rates in different countries. If the European Central Bank's (ECB) interest rate is five percent and the U.S.'s is three percent, a trader might convert his or her dollars into euros to gain the higher return offered by the ECB. At the same time, however, the trader could also buy dollars forward for delivery some time in the future, thus locking in the favorable exchange. When the trader delivers the contract, he has more dollars left over.


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