What is a forward currency contract?

A forward currency contract is similar to a spot currency contract except for one important distinction: it can be customized to settle (i.e. pay for and take delivery of the currency) at any specified time in the future. A purchaser of a currency may enter into a forward currency contract where they agree to pay a certain amount of U.S. dollars in exchange for an agreed amount of currency at any agreed upon future point in time. This allows a purchaser or seller of a currency to tailor the transaction to suit their specific needs.

Both the Merk Absolute Return and Merk Asian Currency Funds have historically gained currency exposure through the use of forward currency contracts; the net notional U.S. dollar value of these contracts is typically fully collateralized.