Lock in your preferred exchange rate, mitigate risk and start protecting your budget
A currency forward contract is a customisable derivative contract between two parties that lets you set a favourable exchange rate in advance for your preferred currency pair for a future date. Unlike a spot contract where the amount owed is settled immediately, forward trades are a ‘buy now, pay later’ type of currency trade. Currency forward contracts are a hedging tool used by foreign exchange specialists to allow buyers to take advantage of the volatile foreign exchange market and to protect buyers’ trades against currency risk.
✔ Currency exchange is available in the majority of freely tradable currencies
✔ Set the exchange rate now; settle the currency trade up to 24 months in the future
✔ Protect against moving exchange rates during your chosen time frame
✔ Easy tool to help manage exchange rate fluctuations from downturn and upturns in the currency market
✔ Protects business profits from foreign exchange market downsides
To make a Forward trade, you agree to exchange a specific amount of one currency for another at a fixed exchange rate, then settle that trade on a date you have chosen. The trade date that you’ll settle your forward exchange rate can be up to 24 months in the future.
Because the exchange rate is fixed, your exchange rate will be protected from currency movements during the time you have agreed. This is ideal for future payments at times when exchange rates are uncertain, so your money is protected from unfavourable currency market movements between now and the time you need to make your international payment.
By fixing the exchange rate in advance, you can eliminate the risk of currency rate changes on your international transactions. You will be able to calculate the value of all your future transactions within the period of the Forward trade with certainty, taking the stress out of continuing international transfers.
What is the purpose of forward contracts on currencies?
Forward contracts are customisable contracts between two parties to exchange currencies at a date in the future whilst setting the foreign exchange rate in advance. They enable buyers to make a currency swap (eg. GBP/EUR) for a better rate, by protecting the buyer from fluctuations in currency prices.
What is a forward premium?
A forward premium occurs when the expected future price for a currency is greater than the spot price. This situation indicates that the current domestic exchange rate is going to increase against the currency it’s paired with.
What’s the difference between a forward contract and a futures contract?
A forward contract is a private arrangement and the contract is customised to the individual needs of the buyer. A futures contract is traded with standardised terms on an exchange such as the London Stock Exchange.
What is the difference between a forward contract and a spot contract?
A forward exchange contract allows you to secure the current exchange rate for the future, whilst a Spot contract is settled and paid for immediately at the current FX rate.
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