What is a forward contract and why should you use one?

WorldFirst is a global finance platform that simplifies payments for international businesses. We empower cross-border companies to hold funds in multiple currencies – and to save money on cross-border payments.

Our forward contracts let you lock in a specific currency conversion rate up to 24 months in advance, to protect against future currency fluctuations. You can use forward contracts to handle international business payments for goods, services or direct investment.

At WorldFirst, we offer three types of forward contracts, to give you the flexibility your business needs:

• Fixed forward contract. You agree in advance on the exchange rate, trade amount and specific settlement date. The trade is then executed on this date (the value date or the maturity date). In a fixed forward, every element of the transaction is predetermined and the entire trade is executed all at once. It’s a good option if certainty is more important to you than flexibility. Once the contract is in place, you can’t change the rate, amount or timing.
• Flexible forward contract. This gives you a bit more control over the timing and terms of your contract. You still agree to a fixed amount, rate and maturity date, but you decide when to draw down funds or make payments. You can choose to execute the entire trade in one go, or execute it in multiple payments. The only condition is that the total agreed amount is settled by the maturity date.
• Window forward. This type of contract allows you to buy a set amount of foreign currency at a fixed rate within a range of dates (known as windows). Instead of committing to a single settlement date, you can choose any date within the window to complete your transactions. This flexibility helps you take advantage of timing to align with your business needs, while still securing a desirable exchange rate.

WorldFirst calculates the forward rate when you book your contract, to reflect the interest rate difference between two currencies. As an example, if one currency has an interest rate of 5% and the other 3%, the difference (2%) will be factored into the rate. If this difference negatively impacts you, your relationship manager will always be transparent about it before the trade.

By the way, if you need to lock in an exchange rate without tying up your own funds, you may be able to apply for a credit line through WorldFirst (subject to eligibility and approval). Our team works with trusted third-party credit providers to assess applications and set up credit facilities on a case-by-case basis.

Read more: Foreign exchange risk management: How to make international business more affordable