A long position in a fiat-currency forward guarantees the purchase of a certain amount of the underlying (e.g. USD) at a given price (e.g. ETH/USD) when the contract expires. Being assigned an amount of underlying is equivalent to receiving the underlying from the sender. For example, if account A transfers 20 dollars of notional to account B then account B will be credited with an amount of ether that is sufficient to purchase 20 dollars at the market price when the contract expires. The transaction will always be worth 20 dollars regardless of what happens to the ether price of the dollar. It could be compared to the owner of account A handing a cheque for 20 dollars to the owner of account B with the condition that the cheque can only be cashed at the contract expiration date.

The "Notional Transfer" feature of accounts contracts make transactions of this type trivial. It can be used to effect fixed-value payments in exchange for goods and services.

Process

Let's assume a buyer wishes to make payments over the coming month with an expected budget of $100.

1. First, the buyer sells $100 at an exchange and purchases ether which is deposited into an account contract.

2. Using the account contract, the buyer enters in a long USD:ETH forward contract that expires in one month. The underlying notional is the amount of ether obtained in step 1 divided by the forward price. Note, the amount of notional could be more than $100.

3. A first purchase worth $20 is made and 20 dollars notional amount are debited from the buyer's contract position and credited to the vendor's position.

4. Vendor delivers purchased item or service.

5. Both the buyer and vendor can make additional purchases with the (remaining) notional amount.

Assuming no additional purchases are made, the vendor will be credited with an amount of ether equal to the notional ($20) times the current market price of the dollar. This amount is then transferred to an exchange where it is used to buy 20 dollars at the market price. The buyer will be able to retrieve the collateral that still remains in the account contract which will be equivalent in value to the remaining notional amount ($80) at the current market price.

Example

At the beginning of the period, the market price (spot price) of dollars is 0.004 ETH/USD. For simplicity, the forward price for settlement in one month is also assumed to be 0.004 ETH/USD (could be equal, higher or lower than the spot price).

100 dollars are exchanged for 0.4 ETH which are used to collateralize a long position of USD 100.

A payment of $20 is made sometime during the lifetime of the forward contract.

When the contract expires, the new spot price could be equal, higher or lower than the forward price of 0.004 ETH/USD.

Let's look at each case in turn

Short counterparties are account holders on the other side of the trade when the buyer established the initial long position of $100.

In all cases, the final account value for both buyer and vendor is equal to the amount of notional received or retained times the market price (spot price) at expiration time, allowing conversion back to the appropriate amount of dollars.