Companies involved in international trade can be seriously affected by adversely moving exchange rates. A forward exchange contract is an effective hedging mechanism similar to an insurance policy, as it protects a company from unfavorable exchange rate movements.
A forward exchange contract may be defined as a contract between a bank and its customer whereby a rate of exchange is fixed immediately for the purchase (or sale) of one currency for another at an agreed future date.
By doing this, the customer eliminates the uncertainty of the exchange rate variation of the payment or receiving in foreign currency to be made at a future date.
This contract needs prior approval from Central Bank of Libya.