Forward contract

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Forward contract

 

What is a currency forward contract?

Forward contracts, also known as forward foreign exchange, or deliverable forwards, are contract agreements that allow you to fix the prevailing exchange rate in order to pay an upcoming invoice in a foreign currency. A simple but powerful instrument that can protect your rate from fluctuations in the currency market, forward contracts are among the many foreign exchange tools that we have to offer.

 

What are the benefits of a currency forward?

The main benefit of forward contracts is that they allow you to fix the exchange rate that you’ll use when making your next international business payment. This gives you the ability to plan ahead with a degree of certainty, knowing exactly how much money will leave your account when you purchase items denominated in foreign currencies.

If the prevailing rate favours your business, it makes sense to lock the rate, as this will mean that you’ll be protected from unfavourable shifts in the exchange rate. Regardless of what happens in the foreign exchange markets, you can rest assured that you’ll receive the forward exchange rate that was secured by your forward contract.

 

Why would I need a currency forward?

If you run a business, it is highly likely that you will regularly have to meet the cost of large invoices or make orders of goods sold abroad. With a currency forward contract, you can mitigate the risk that the currency markets can pose to such purchases, thereby ensuring that the prices that you pay for these items do not rise because of unfavourable moves in the foreign exchange markets, thereby. Given the protection that they can afford, forward contracts are often used by businesses as hedging strategies to reduce their currency exposure.

To provide an example of a forward contract in action and how it can make a difference, when the UK Government announced their mini-budget at the end of September 2022 sterling fell heavily, trading in the low 1.10s, and an all-time low of 1.03. Now let’s imagine that your dollar-buyer business had agreed a forward contract before this event. It would have been hugely advantageous because your business' exposure would have been protected from this extreme volatility and you would have received an above-market rate for your international payments.

 

What is the price of a forward contract?

A forward exchange contract, or forward contract, is just one of the many foreign exchange tools that we offer at Moneycorp. Depending on your facility agreement, we may require you to provide a deposit in order to secure your forward. This is something that you are welcome to discuss with our dedicated Relationship Manager, who will inform you as to whether, in addition to the cost of your forward contract, you will need to provide a deposit. They will also be more than happy to talk you through the other foreign exchange instruments that we have to offer.

 

How long can I secure a forward exchange contract for?

Our forward contracts typically allow you to secure an exchange rate for up to two years. With a Moneycorp business account, you’ll be able to agree the terms of your forward contract with your Relationship Manager. This will determine the duration of your forward contract and the amount that is to be paid, as well as address any queries or concerns that you may have.

We provide a wide range of other FX solutions that can help meet your business’s needs, in addition to our foreign exchange forward contracts..

 

Why use Moneycorp for your forward contracts?

If you choose to enter into a forward contract with Moneycorp, you will be able to enter into a forward contract to buy more than 120 currencies at a fixed rate. While you may be required to leave a small deposit in order to enter into a forward exchange contract, you will be able to use this tool free of charge upon opening a Moneycorp account.

 

Advantages and disadvantages of forward contracts

The main advantage of forwards contracts is that they eliminate the downside risk exposure through a fixed future rate. They provide a degree of certainty, allowing businesses to protect their budgets from fluctuations in currency prices and lock in favourable rates ahead of time.

However it’s worth noting that there is no opportunity to benefit from favourable movements in exchange rates. Currency forwards must be carried to settlement; closing them before the agreed date will incur a cost.

 

What are the alternatives to a forward contract?

 

For those looking for alternative options to forward contracts, there are other ways in which businesses and individuals can reduce and limit their exposure to fluctuations on the FX market. These instruments include spot contracts, FX orders and FX options.

Spot contracts

Spot contracts

Use the current exchange rate to make an international payment by agreeing a spot contract.

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FX orders

FX orders

If you require a particular exchange rate but there is not an urgent need for you to make a purchase, using an FX order is probably your best option.

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FX options

FX options

Foreign exchange options include FX instruments that can be used to manage your foreign exchange risk, in addition to foreign exchange instruments that can give you the opportunity to out-perform market rates.

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Our foreign exchange solutions for your business

To find out more about our foreign exchange and global payment solutions for businesses, view our brochure.

Our foreign exchange solutions for your business

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*Forward Contracts may or may not require a deposit dependent upon your facility agreement.
**Our team of experienced currency risk management specialists are approved by the FCA for investment business. Following an initial assessment of your risk-appetite and investment objectives they can formulate and illustrate a bespoke solution for you to consider. Please note that Option related products are regulated investment products which can carry a higher level of risk than Forward Contracts.