Forward Contract:
Secure an Exchange Rate
A forward contract is a risk management solution that allows businesses and individuals to secure an exchange rate today to complete the money transfer at a specific date within 12 months. This reduces their currency risk if the exchange rate were to fall within that period and gives them an exact cost for the money transfer.
About:
Forward Contracts
If you’re unsure whether an fx forward contract is right for you and your business, contact one of our friendly advisors who will go through your options to find the best solution for you.
When Are Forward Contracts Used?
If exchanges rates are currently in your favour, you can lock in that rate, through a currency forward contract to avoid the risks of economic uncertainty. This is particularly useful for businesses who have future payments in foreign currencies, as they can allow you to protect your budget and profit margins, by removing any concerns about the unpredictability of currency markets.
What Are The Advantages of a Forward Contract?
Forward contracts can be used to plan investments, as they are based on a fixed rate exchange, specific to the date they were created. This provides certainty against currency price fluctuations, allowing companies to protect themselves against the risks that the market fluctuations can create.
What Are The Disadvantages of a Forward Contract?
As a forward contract secures the exchange rate and fixes the buy and sell amounts, it helps avoid adverse exchange rate fluctuations in foreign currency transactions. It does mean you cannot take advantage of the rates if they continue to rise and become even more beneficial for you. A forward contract protects you if the rate declines, but you cannot benefit if the rate continues to improve and moves more in your favour.
Types:
Forward Contract
There are different types of forward contracts available. The following contract types can be ideal for certain situations, but you should ensure you speak with a specialist, such as NewbridgeFX, who can explain what the best option is for your particular situation.
Fixed forward contracts
These make it possible to exchange one currency for another on a fixed date in the future. You secure the exchange rate today and transfer your money on a specified date in the future.
Open, flexible, or variable
These make it possible to exchange currencies and secure a forward exchange rate today for settlement on a specified date in the future. You can draw down and use some, or all, of the contract before the original settlement date. These are useful if you need to send funds or have access to the funds before the agreed future date.
Non-deliverable, time options & window contracts
NDF’s (non-deliverable forwards), Time Options, and Window Forward Contracts are less common but may be suitable for your needs. Speak to NewbridgeFX for further information.
Case Study:
Supplier Goods
A company buying goods from a supplier in 6 months time.
A large furniture company forecasts that they will be buying $100,000 USD of goods from their supplier in 6 months’ time. To protect against uncertainty from currency fluctuations, the furniture company requested a quotation for a forward contract with NewbridgeFX.
The spot exchange rate for GBP/USD was 1.36 which came to a cost of £73,529 GBP to exchange to $100,000 USD.
The company decided to secure the spot exchange rate for the fixed price and settle the contract (i.e. transfer the money) on the agreed settlement date in 6 months’ time.
In the following months, the exchange rate changed significantly in a negative direction to 1.12. Had the furniture company not drawn up a forward contract with NewbridgeFX, they would stand to lose over £15,756. The forward contract enabled them to reduce their exposure to the currency fluctuation and make payments at a rate that ensured their profits were not affected.
FAQ:
Forward Contract:
How do I secure a forward contract?
Answer
Once you register an account, you can ask for a FX forward to buy a specific amount of currency, at a specified date in the future. If you confirm you want to proceed the contract becomes an agreement between both parties, and the exchange rate is secure and locked in. You would need to transfer a deposit, held as a balance against the contract (5% of the value of the contract is common). When the settlement date (otherwise known as the maturity date) arrives, you transfer the remaining balance to our account. Once received we will transfer the agreed amount of currency to your nominated beneficiary account. The contract agreement is then finalised.
What is the cost of a FX Forward?
Answer
There are no additional fees to secure a forward contract agreement. The buy and sell amounts would be secure and fixed for the duration of the contract. A deposit may be required at the time of securing the forward contract with the remaining balance due on the settlement date
How are forward exchange rates calculated?
Answer
In simple terms, interest rate differentials between two currencies determine a forward contract exchange rate. They are not a forecast of where the rates may be in the future. If you are selling a currency where the country has a lower interest rate, compared to the buy currency/country, then the forward rate will be higher than the current spot rate, and vice-versa.
What are the disadvantages?
Answer
As a forward contract secures the exchange rate and fixes the buy and sell amounts, it does mean you cannot take advantage of the rates if they continue to rise and become even more beneficial for you. A forward contract protects you if the rate declines, but you cannot benefit if the rate continues to improve and moves more in your favour.
Can they be used as part of a hedging strategy?
Answer
While forward contracts can protect against the exchange rates declining over time, you cannot take advantage if the rate continue to rise. As a result, there are various hedging strategies to utilise, such as securing 50% of the total value as a FX forward, with the remaining value booked as a spot contract at a later date. You could also use Market Orders to secure the remaining 50% value should your desired rate be obtainable in the future; but Market Orders will only execute should your desired rate be achievable in the market, and are not guaranteed. NewbridgeFX can help you set an appropriate risk management hedging strategy to help you achieve your objectives.
Products:
Manage Risk
NewbridgeFX offers a specialist service in the deliverable foreign exchange market, promoting a range of products and services, available online or over the phone. Our products have been designed to meet the needs of our clients when sending money overseas, and are ways for businesses, and individuals, to manage and mitigate currency risk.
Spot Contract
Lock in an exchange rate to settle immediately. Funds can be received the same day for most currencies.
Forward Contract
Lock in an exchange rate today, but for settlement at a later date that suits you, up to 12 months in the future.
Market Order
We monitor the markets real time and take action to trade between currencies when your desired rate is achieved.
Rate Alerts
Set an alert for phone or email notification when a rate has been achieved to take advantage at the best time.
Testimonials:
NewbridgeFX
We strive to earn the loyalty of our clients by consistently delivering a dedicated, professional foreign exchange service, and focusing on providing a great client experience. We have a vast and varied client portfolio. Our experience and expertise in managing international payments applies across a wide range of industries, from accountants to warehouses.
If you’re looking for an easy and cost effective way to make international payments, this is who you should be using. I’m pleased to say they have saved me, my friends and family money month on month. Someone is always available to talk to and I am kept updated
Having worked with them for sometime now, I’m happy to say they have consistently demonstrated a personal and dedicated level of service above and beyond that offered by my bank and previous provider. Its refreshing to work with a company that really cares about their client. Always recommending to anyone with an FX exposure.
A. Lee
Amazing service, every occasion my funds have arrived on or before the date quoted. They also notify me of market movements which effect my bottom line along with educating me on why the markets react. We currently make a large volume of payments and I have tried a few other providers and nothing compares to the professionalism they offer and I need for my business.
O. Long
Benefits:
NewbridgeFX
Multi-Currency Account for Business
Send, receive and hold multiple currencies in one account with a single account number. Reduce currency transfer fees and potential FX exposure for better financial control and privacy protection.
Create And Manage All Your Beneficiaries
Add and manage your beneficiaries, perform bank account validation & verification checks as you enter your beneficiary details & bulk upload multiple beneficiaries via a CSV file.
Make Fast & Secure Payments To Over 200 Countries
Real time Swift and local payments are settled the same day, within minutes of processing (currency/country dependant), and payment tracking capabilities allow you to keep updated on the payment status.
Multi-Currency Balances
Hold multiple currencies and access balance information in supported currencies. Receive, convert, send and move money between your multi-currency accounts without making payments.
Convert Over 100 Currencies, 24/7, Using Multiple Devices
We provide informative, up to date market news, including updates on currency movements, upcoming economic events and announcements that impact the foreign exchange market.
Real-time Reporting And Tracking
View and track all conversions, payments and incoming funds using our online platform, and receive email notifications when funds have been received, conversions processed and payments released.
Benefits:
NewbridgeFX
Multi-Currency Account In Your Company Name
Receive funds from your customers in to your own named collection account, using one account number for all currencies, or a local in-country account number still in your company name.
Create And Manage All Your Beneficiaries
Add and manage your beneficiaries, perform bank account validation & verification checks as you enter your beneficiary details & bulk upload multiple beneficiaries via a CSV file.
Make Fast & Secure Payments To Over 200 Countries
Real time Swift and Local payments are settled the same day, for most currencies, within minutes of processing. Live GPI Payment tracking capabilities allow you to keep updated on the payment status.
Multi-Currency Balances
Hold multiple currencies and access balance information in supported currencies. Receive, convert, send and move money between your multi-currency accounts without making payments.
Convert Over 100 Currencies, 24/7, Using Multiple Devices
We provide informative, up to date market news, including updates on currency movements, upcoming economic events and announcements that impact the foreign exchange market.
Real-time Reporting And Tracking
View and track all conversions, payments and incoming funds using our online platform, and receive email notifications when funds have been received, conversions processed and payments released.