What is a forward booking in Forex what is it & how does it help

Forward bookings are like forward contracts, the same as in futures and options (derivatives market).

It is an effective tool for mitigating the risks of exchange rate volatility. There are forward forex booking companies which book contracts with their clients for a fixed exchange rate for a particular currency. Such contracts are to be executed within a given time frame. They (the companies) charge a fixed percentile of the contract value as per the agreed terms and conditions between them and their clientele.

Effectively these companies (risk agents) transfer the risk from their client to themselves.

Example

Mr. A (in US) has purchased cars from Mr. B (in Japan). As per the agreed terms and conditions Mr. A would be making payment of 115,000 Yen to Mr. B on a specified date.

Currency for US: USD

Currency for Japan: : Yen

Current exchange rate:115

Now if on the actual date of payment the exchange rates of Yen/USD are stable then that’s no problem to either of the party. But if the exchange rate surges to 118/USD, Mr. A will benefit by paying less USD for making payment of 115,000 Yen.

The cost for Mr. A would be 115,000/118 = 974.58 USD

However if the Yen/USD exchange rate plunges to 112 Mr. A would pay higher than the budgeted amount.

The cost for Mr. A would be 115,000/112 = 1026.78 USD

To safeguard against any such volatility Mr. A could enter into a forward contract with a Risk agent for a nominal fee. By doing so, the forex risk would be transferred to the risk agent and Mr. A would be guaranteed the Yen/USD exchange rate of 115 for the specified time period.