A Forward Exchange Contract is an agreement between two financial institutions, in which they agrees to buy or sell foreign currency on a fixed future date, or during a period expiring on a fixed future date, at a fixed rate of exchange. The forward exchange contracts, both buying and selling, may be either fixed or optional term contracts. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. Forward Exchange Contracts can be used to cover the exchange risk between two country’s currencies.