The current political and economic uncertainty necessitates careful business planning. Forward contracts are an effective means of protecting your foreign currency exposure from volatility, particularly for future payments or receipts.
What is a forward contract?
Forward contracts enable you to reserve a forward price for buying or selling currencies on a specific date in the future. The price you lock in is determined on the day you agree the amount and settlement date for the forward contract.
How can forward contracts protect your business?
Forward contracts are particularly useful for businesses that have future payments or receipts in foreign currency because they allow you to protect your budget and profit margins. They can be an important part of a company’s hedging toolkit, as they remove any concerns over the unpredictability of currency markets, enabling you to lock in a forward rate and focus on running your business.
Types of Forward Contract available to your business:
- Fixed Forwards: Exchange one currency for another on a fixed future date
- Open Forwards: Exchange one currency for another between the trade date and a date in the future
- Window Forwards: Exchange one currency for another between two dates in the future
- Non-Deliverable Forwards: Cash-settle the profit or loss upon maturity of a fixed forward
Each contract type has pros and cons, and our team of risk management experts would be happy to explain these further. We can also offer sound advice on which type of contract would be best for your business’s needs.
How do forward contracts work?
Unlike spot contracts, forward contracts can be seen as a ‘buy now, pay later’ arrangement that helps protect you against adverse fluctuations in the currency market. Let’s say, for example, that you know your company needs to purchase goods in six months’ time and those goods will cost you $1 million. Now, the price of $1 million in sterling is entirely dependent on the GBP/USD exchange rate at the time of purchase.
Example of a Forward Contract
Let’s imagine that you have done all your costing, pricing and budgeting and have calculated that purchasing $1 million at an exchange rate of 1.34 (GBP/USD) will cost you £746,268.
However, in six months’ time when you come to actually buy the dollars, the exchange rate is now 1.2800 (GBP/USD).
That same $1 million will now cost you £781,250. That represents a loss of £34,982 and could have a direct impact on your profits, margins and bottom line.
In the example above we have cited an instance where you stand to lose – and it’s certainly worth pointing out that the market could move in your favour and $1 million could cost you less in six months’ time. However, can your business afford to take that risk? The peace of mind that comes from locking in a rate for the future – and the certainty you gain as a result – makes the business of costing and budgeting much more straightforward.
Why book your Forward Contract with us?
- Remove uncertainty surrounding the currency markets.
- Your business can benefit from locking in a forward contract for up to two years.
- Forwards can be booked as weekly, monthly or quarterly contracts to line up exactly with your future cash flows.
- If you have regular trading requirements, you may benefit from our API solutions. They allow you to bulk upload contract specifications, so you can trade quickly and efficiently.
- If you have specific requirements in terms of dates, amounts, long-dated contracts and so on, our experienced team would be delighted to assist.
Identify Currency Risk Using Our Handy Tool
You can use the calculator below to identify the currency risks you could have exposed your business to by using spot contracts rather than forward contracts over the last 12 months. It is important to bear in mind that the past is not necessarily indicative of the future, so there is no way of knowing how the next 12 months will pan out for the currency pairing you select. However, we believe this tool highlights how quickly and significantly currency markets can change. By helping our clients understand how much they could have lost over the last year, we want to illustrate how effective forward contracts can be in protecting your business’s profits, margins and bottom line.
Find out how much Forward Contracts could save your business
“Forward contracts allow us to lock in a rate and know exactly what the season will cost us. It also lets us know what we will be able to achieve, profit-wise. We have a good relationship with Smart Currency Business. We get currency providers ringing us up almost every day, but we’ve been with Smart Currency Business for a while. I have recommended Smart Currency Business to others; it’s a great company to work with. Very straightforward. And there’s a personal service, a personal touch.”John Snare