A great exchange rate can save your business big bucks on international money transfers, while an unfavorable one can quickly eat into your profits. Since the currency market is always on the move, it can be tough to predict where currency rates will land when it’s time to process your payment.
There are multiple ways to manage international payments. Let’s focus on two of the most common, spot contracts and forward contracts. If your company needs to make a payment immediately, a spot contract will let you book a rate and make the exchange fast. If you need to make a payment up to three years in the future but don’t want to worry about how the rates might change, a forward contract is available. Here are some things to consider to help you decide what’s best for your business.
With a spot contract, you buy or sell international currency in the moment, or “on the spot.” Spot contracts use competitive prices based on live exchange rates so you can transfer your payment and move on. They give your business the flexibility to make currency transfers as needed, so there’s no long-term commitment.
For instance, let’s say you work for a US real estate investment firm and spot a prime piece of property available on the coast of Spain that’s too good to pass up. You check the current euro exchange rate, negotiate a selling price with the Barcelona-based brokerage and agree to the sale. You need to make the payment fast, so you use a spot contract to book and complete the transfer. Now you can sit back and relax knowing the full payment will be delivered in just a few business days.
In contrast, forward contracts let you lock in today’s exchange rate for a future transfer. Just pick a payment date, the amount of the payment, sign off on the rate, make a deposit to secure your rate and it will be waiting for you when you’re ready to make your transfer. Forward contracts are great tools for companies that know they will need to make a payment in the future, but want the security and peace of mind associated with protecting against rate fluctuations.
For example, assume you own a custom motorcycle business. You know you will need to purchase 5,000 tires from a rubber manufacturer in Thailand six months from now to build your new models. You and the rubber manufacturer agree on a price of $260,000 USD for the sale, to be paid in six months. This is a good deal for your business based on current foreign exchange rates. But if the value of the Thai Baht increases over the coming weeks, you’ll end up paying more for the tires. To minimize this risk, you would use a forward contract to lock in the current exchange rate. You won’t have to worry about unexpected costs in six months, since you’ll know exactly how much your next shipment will be, leaving you more time to manage your business.
At World First USA Inc., our client relations team can help devise a strategy that works for you. After that, our account managers will walk you through the final steps of our fast and easy process, so you can get back to growing your business.