BCC Corporate Identity

Currency expert, moneycorp, offers insight and guidance into the fast moving world of foreign exchange.

Have you been stung by the recent volatility in the currency market? Have your profit margins been impacted by adverse currency market movements? Would you like some level of certainty around the exchange rate to assist with your forecasting? Forward Contracts enable you to fix the rate of exchange and may be a useful way to help you manage currency market risk more effectively.

What are they?

Forward contracts are a contractual obligation between you and your provider to buy or sell currency at a pre-determined rate of exchange, on a pre-determined volume of currency, for use in the future.

Forward Contract Variations

Fixed forward:

A contractual obligation to buy or sell a pre-determined volume of currency on a fixed date in the future. You will settle for the currency on maturity of the contract.

Flexible Forward:

A contractual obligation to buy or sell a pre-determined volume of currency within a range of dates in the future. Typically you will be able to draw down as much or as little currency at any one time with the obligation to use all of the currency by the end of the contract period.

Example:

You have just secured a contract with an overseas customer, the contract is priced in Euro’s. You will need to convert the Euro’s back to GBP when you receive them. You have priced the contract based on an exchange rate of 1.3500 (the current forward rate). The value of the contract is €200,000. You are due to receive two stage payments of €50,000 over the next 6 months and a final payment of €100,000 on completion. You are concerned if the exchange rate moves to €1.4000 it will impact your profit margin. You book a flexible forward contract for €200,000, for a period of 6 months at an exchange rate at 1.3500 (the current forward rate). When you receive the Euro’s from your customer over the next 6 months you send them to your provider and they send you the GBP at the agreed rate of 1.3500 irrespective of the spot rate.

Considerations

  • The price of a forward contract is influenced by the current spot rate, the length of term of the contract and interest rate differential between the currencies.
  • Booking a forward contract with your bank may impact other lines / facilities you hold with them.
  • Typically you only need to pay for the currency when you use it so it doesn’t have a significant impact on cash flow. However, your provider may ask you for a deposit of up to 10% to secure the forward contract.

If you need to make an international payment, get in touch with your local Chamber you can contact moneycorp’s Regional Manager, Barbara Sutton by email to [email protected] or call 07785 463671 to speak to me directly. It’s completely free to open an account and there is no obligation to trade.
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Barbara Sutton, Chamber FX