We realize forward contracts can seem complicated. Don’t stress: we’re here to simplify. Forward contracts can make life a lot easier, especially when it comes to fixing your budget rate and managing your costs. To help you understand the basics in just a few minutes, we’ve answered the questions that are asked most often.
What is a forward contract?
It’s an agreement to buy or sell a fixed amount of currency, at a specified rate on a set date in the future. A forward rate can be booked for any date, from a week to three years in advance.
Why should I consider a forward contract?
Forward contracts are an essential currency tool for businesses who are buying or selling products in other countries, and looking to protect their budget rate and manage their profit margins. A forward contract relieves any worry about currency fluctuations.
For example, imagine you are a business that has sold your products to another business in Germany and you have agreed they will pay you in euros in 3 months’ time. The rate you have budgeted for this transaction is 1.10, so the German business is paying you €100,000. To maintain your profit margin you need to get $110,000 and the current forward rate for 3 months’ time is 1.11, so you can lock this rate in and know you will get $111,000 for those euros.
By locking in a forward rate, you have gained the peace of mind that the money you have budgeted to receive is the amount of money you’ll actually get. Now you can concentrate on more important things, like running your business.
How far in advance can you prepare a forward contract?
A forward contract can be set anywhere from a week to three years in advance.
What if the spot rate changes in the lifetime of my contract?
You don’t have to worry about currency fluctuations when you have a forward contract. The contract ensures that if the currency fluctuates, you keep the same rate. You no longer have to change your pricing because of a shift in rates.
In the lifetime of your forward contract, you may be asked for an additional deposit. Ask your account manager for more details.
Do I have to complete the contract?
Yes, once the contract is fixed you must complete the contract.
Can you have multiple forward contracts or a mix of spot contracts and forward contracts?
Since every business is unique, so is every currency strategy. For some businesses, it makes sense for all their currency exposure to be protected with forward contracts. For others, it’s better for them to protect only part of their currency exposure using forward contracts. We are here to help you put together a currency plan that suits your business. Get in touch with your account manager to start planning now.
Is it difficult to set up a forward contract?
Thankfully, it’s not. Setting up a forward contract can be done in just a few minutes over the phone with an account manager, who will answer you in 3 rings.