Final answer:
The forward exchange rate in a forward contract is fixed at the time of agreement, providing certainty against currency market fluctuations and serving as a risk management tool for international transactions.
Step-by-step explanation:
The answer to the question regarding forward contracts is true. With forward contracts, the forward exchange rate is indeed fixed at the time the contract is agreed upon. This rate is not subject to change based on the fluctuations in the currency markets, hence providing certainty for both parties involved in the transaction. The purpose of a forward contract is to lock in the exchange rate for a future transaction, which can be particularly beneficial for businesses dealing with international trade or finance where currency risk is a concern.
The forward exchange rate is fundamentally a price that is agreed upon for the exchange of one currency for another at a future date. Through the operation of supply and demand in currency markets, the exchange rate in spot transactions may vary. However, with a forward contract, the parties are effectively bypassing the day-to-day market fluctuations.