A forward contract allows you to fix a prevailing exchange rate for a future overseas payment. Protecting your rate from any upturns or downturns in the market, a forward contract is also often referred to as a currency forward or deliverable forward and is one of many foreign exchange tools we offer.
Agreeing a forward contract helps fix the cost of your international business payment, allowing you to plan ahead with reassurance and certainty. Should the current rate be favourable to your line of business, you can lock the rate and protect it from any movements. This means that should the rate drop, you will still receive the forward exchange rate you locked in.
This works both ways, however, as a disadvantage of a forward contract is that it would provide you with the same agreed exchange rate even if the rate moved even further in your favour by the time it came to settlement.
Forward contracts are often used as part of a hedging strategy to reduce the currency exposure of your business. As a business, there may be large invoices to pay or orders to make on a regular basis. With a currency forward, you can shield these payments from any exchange rate movements and mitigate the risk that the currency markets can pose. This is ideal if you’re looking to protect profits or maintain a tight budget.
A forward contract example would be when the GBP/EUR exchange rate was 1.31 on the 23rd June 2016, the day of the EU referendum. After the result, market uncertainty saw the rate initially fall to 1.23 the day after and fail to return to its pre-referendum high over the next two years. Had your business agreed a forward contract prior to this, you would have received an above market rate for up to two years of international payments.
A forward contract is just one of the range of free FX tools we offer at Currecny Hedger, however we may require you to provide a deposit in order to secure your forward. This will depend on your facility agreement. You can discuss this with your dedicated Relationship Manager who can inform you whether or not you will need to provide a deposit, as well as the cost of your forward contract. In addition, they can talk you through our range of alternative products.
The forward contracts we offer typically allow you to lock in an exchange rate for up to two years (this may require a deposit). With a moneycorp business account, you are able to agree a forward contract by speaking with your dedicated Relationship Manager. They can talk you through the process and agree an amount and duration for your contract, as well as answer any questions or queries you may have.
In addition to a foreign exchange forward contract, we also provide a wide range of FX solutions for your business needs.