Exchange rate risk, being a consequence of an irrevocable nature of a forward contract and lack of possibilities to anticipate exchange market developments from conclusion of a contact through its exercise, is a basic type of risk in foreign currency forward contracts. From a bank´s point of view such risk might be reduced through an immediate execution in the interbank market of all operations related to the forward transaction considered, and making forward rate dependent on the operations´ parameters.

However, an appropriate procedure for setting exchange rates protects a bank only in case a counterparty exercises its part of the forward contract. Otherwise the bank is obliged to close operations related to a certain future contract on its own, which may mean a loss in case of an unfavorable changes in spot rates. Given the risk of a loss, the bank making a future contract opens a forward limit for its customer equal to its potential loss usually set at 10-15% of the contract value.

Most advanced forward contracts allow for exercising a contract without delivery of the equivalent of currency purchased. In such cases we deal with settlement risk where the customer´s account is charged with an amount equivalent to the forward contract value irrespectively of the account´s balance. Thus, the settlement limit is transformed into stricte credit limit.