UK-based company Acme Ltd is making a machinery purchase from a US company in 6 months. They would like to hedge against adverse currency fluctuations for that time period to ensure clarity of their costs. To do so, Acme Ltd executes a Forward Contract:
An agreement between two parties to exchange one currency for another at a pre-agreed date in the future. The rate is calculated using the spot rate and a forward point adjustment for the tenor of the contract. The pre-agreed rate will remain fixed regardless of appreciation or depreciation of the currency pair during the period.