A bad move in the currency markets can cost you a lot of money. Depending on how much you’re planning to transfer, a shift could cost you as much as four or five figures. This puts you at the whims of the market, especially if you’re thinking long term. The rate might suit you now, but six months down the line, who knows?
One of the most effective strategies for minimising this risk is what’s known as a ‘forward contract’.
If you’d like to know what your exchange rate for a particular transaction will be up to two years in advance, then a forward contract could be ideal depending on your situation.
So, what is a Forward Contract?
Put simply, a forward contract is a contract between two parties to buy (or sell) foreign currency on a specific date at a fixed price.
By setting the date and exchange rate in place, you can protect yourself against all kinds of currency movement.
There are a number of benefits to this approach:
- It allows you to budget with no uncertainty. You’ll know exactly what you’re paying and what rate.
- You can book the purchase now but actually pay later on. This means more flexibility.
- It means less day-to-day stress. Your transaction will be set up months before it completes, so there’s no last-minute worry.
- In some cases, you may be able to spread your payments out between the initial confirmation and the final payment date.
- Forward contracts are safe and secure and are authorized by the FCA. This gives you real peace of mind.
On larger purchases especially, being able to budget well in advance can be invaluable.
Specifically, let’s say you’re planning a property purchase. A forward contract will allow you to buy the property when the rate is favourable to you, even if you’re not planning to complete the purchase until later.
So, what’s the difference between this and a Futures Contract?
Though the names are similar, futures and forward contracts are very different things.
- Forward contracts are private, customized agreements between two parties.
- Futures contracts are standard trades made on an exchange.
Futures contracts are typically used by betting speculators, and often never reach completion.
Forward contracts are more suited to hedgers and serious investors looking to complete a specific purchase.
What are the cons to a currency forward contract?
Essentially, there’s only one potential downside, and you’ve probably already worked it out!
If you agree to a set rate and then the markets move against you, then you are still obliged to trade at the agreed rate.
And, of course, once you’ve signed up to the forward contract, you’re legally obligated to complete it. So don’t enter one unless you’re sure it’s what you need!
The other thing to bear in mind is that if you want to delay payment, you’ll need to apply for credit as you would do in any other situation. Your eligibility will affect which terms you’re able to get.
This is why it’s a good idea to work with a reputable FX broker if you’re planning to take out a forward contract.
Their in-depth knowledge of the currency markets will mean that they can help you secure a good rate so that even if the markets do move against you, you’ll still get relative value for money compared to the interbank rate.
How to Do a Forward Contract
Forward contracts are easy to arrange. All you need to do is call your chosen FX provider, and they’ll be able to work with you to get the best rate.
- From that point, you can agree to proceed, or to not!
- Once you’ve signed up, you can then spend the time until completion arranging the capital or paying off the instalments.
- Then, on the deadline, the transaction will complete at the agreed rate.
It’s that simple.
Like to know more?
If you’d like to know more about how you can get maximum value from your currency exchange, Privalgo can help.
Our currency transfer experts can help you get a great rate, and ensure an easy transaction.Book a chat with a currency specialist