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What is a Forward Contract? - Money Transfers with Forward Contract

What is a Forward Contract? - Money Transfers with Forwarding Contracts

Money Transfers with Forwarding Contracts is one of the most commonly used currency options in foreign currency hedging. It sets a rate of exchange for a date in the future and offers 100% protection if the currency exchange rate moves against you. There is no premium to pay to enter into a forward contract. Forward contracts are popular as they can help you to reduce the risks of fluctuations in the currency markets which affect any business that trades or has assets overseas.

One of the main benefits of forwarding Contracts without having to use up valuable working capital.is you can lock in an exchange rate for a specific amount of currency with a forward contract so that you can use it at a later date. This can be crucial for businesses that import or export goods overseas where they can now protect themselves against changes in foreign exchange rates and other foreign exchange risks.

Consider that a small variation in the foreign exchange rate could cost your business thousands of pounds if not managed properly and if that rate continues to move downwards could eat all your profit and really hit your bottom line and asset base.

There are two main types of forwarding Contracts for currency exchange

Fixed forward contracts
You take delivery of your forward currency on a specific date in the future.

Open forward contracts
You can take delivery of all the foreign currency at once, or drawn down smaller amounts as you need them - up to the amount of the value of the contract.

Advantages

  • 100% protection if the rate moves against you
  • No premium

Disadvantages

  • 0% benefit if the rate moves in your favor

If you'd like to protect your bottom line by locking in a rate and still benefit if the rate moves in your favor then Currency Options could work for you.

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