Forward Contracts, also known as Currency Forward Contacts or FX Forwards, are rising in popularity due to an uptick in currency volatility and the ease with which they can be accessed.
This simple hedging tool, once reserved for multinational corporations, is now readily available for everyone, including individuals and SMEs. B
Booking a Forward Contract enables you to lock in today’s exchange rate for the future and mitigate currency volatility, making it a useful tool for individuals or businesses attempting to manage their FX risk exposure.
Everyone Loves Forwards
A Forward Contract is a straightforward tool (as opposed to some other currency hedging tools).
It locks today’s FX price for the future, with no “ifs and buts”.
But, there are still important questions that must be addressed before entering into a Currency Forward Contract agreement.
Before We Begin: What Are Forwards
A Forward Contract is a financial arrangement that allows two parties to buy and sell an asset at a fixed price in the future.
A Forward Currency Contract is a foreign exchange instrument that allows two parties to buy or sell a currency pair at a guaranteed exchange rate in the future.
The FX rate you receive with a Currency Forward is the prevailing exchange rate at the time of entering into the agreement.
The rate is often advertised as the ‘current exchange rate’ but it will differ slightly due to what’s known as ‘interest rate differentials’ – more on this later.
For example, if you are booking a GBPEUR Forward Contract for a period of 12 months, it means that 12 months from now you have committed to buying a certain amount of euros at the GBPEUR rate as it is today. How the currency pair moves during this time is irrelevant to the rate you achieve.
Is a Forward Contract the same as a FX future?
Forward Contracts and Currency Futures are both derivatives that offset the effect of currency movements but their mechanisms are different.
A Forward Contract is an Over-The-Contract arrangement made with a financial institution and is only settled when it comes to maturity (as dictated in the contract), while Futures are publicly traded on exchanges and settled on a daily basis with set maturity rates.
In other words, Forwards are more of a bespoke tool – you buy a Forward Contract matching your specific needs, but also commit to it without any exit options, whereas a Future can always be sold.
Like Currency Forwards, Forex Futures are just one type of future contract. You will also find commodity futures (such as crude oil, gas and wheat), stock index futures and bond futures (i.e. UK/US treasury bonds).
Are Forward Contracts limited to 12 months?
Most banks and providers will offer Forward Contracts up to 12 months in the future but some established brokers like moneycorp are able to offer longer Forwards of up to 24 months and even longer than that.
Since, as mentioned above, a Currency Forward is a bespoke contract which is negotiated between two parties (the issuer and the entity buying the Forward), it all depends on who these parties are.
The maximum length of time you can book a forward contract?
Do I need to pay a deposit for a Forward, and why?
When you book an FX Forward Contract, you are generally required to put down a deposit.
The reason is that specialists and banks need to protect themselves from a default or cancellation of the contract.
The deposit is normally 10% of the value of the agreement.
If currency movements mean the deposit becomes substantially less than 10%, the provider may ask you to top it up. The reason for this is because if you cancel the contract, the provider is then required to purchase the original selling currency at the prevailing exchange rate on the date you cancel the agreement.
Consider the deposit the same as you would paying a deposit on a sofa – only the remaining 90% is then due when the Forward Contract matures.
In some cases, specialists like moneycorp which are very seasoned in this business will remove the need for a deposit.
Though this is typically only for business clients.
How to book a Forward Contract?
Whether you are a corporation, SME, sole trader, or an individual who doesn’t own a business at all (but has FX requirements such as proceedings from a sale of property abroad), and annual amounts surpass £10,000 then you are eligible to book a Forward with any of the following providers:
Which Forward Contracts are available to buy?
A Currency Forward booking with these specialists is an easy and friendly process, and the variety of currencies in which they deal with is extensive.
The most popular Forwards are the GBPEUR Forward, the GBPUSD Forward, and USDEUR Forward but customers are able to buy FX Forwards for all major currencies and the majority of exotic currencies.
For example, you can book a Forward for GBPAUD AUDNZD USDCHF USDJPY NZDUSD USDCAD AUDUSD but also exotics such as GBPILS or GBPAED.
Should I use Forward Hedges at all?
If you have exposure to foreign currencies, it’s at least worth considering understanding the associated costs to booking a Forward hedge.
Currency Forward Contract Pros and Cons
A Forward Contract enables businesses and individuals to lock in today’s rate for months, or, in some cases, even years to come and mitigates against future (adverse) movements in a certain currency pairing.
When booking an FX Forward Contract, many will ask if it’s not better to either wait for a better rate to lock, or alas, not hedge at all.
The answer is dependent on your circumstances.
The most popular use cases are as follows:
You or your business is due to receive a large sum from abroad and you want to know exactly how much you’ll receive in your domestic currency.
You don’t want to risk losing a chunk of that payment due to currency movements.
You have to make a future payment (or payments) and you want to know exactly what you will have to pay in your domestic currency.
Businesses commonly use them to pay contracts, freelancers, suppliers and employees abroad (i.e. global payrolls). For individuals, they are often used to buy property overseas.
You or your business owns a large amount of foreign currency and you don’t want to risk losing money if rates move against you.
Example: Cost in GBP of Buying a €200,000 Property Over the Years
By using a theoretical example, we can see the impact of currency exchange fluctuations over time and the impact this has when budgeting for an overseas purchase.
Forward Contracts are one way to secure the exchange rate when they are favourable – the rate may move for or against you after the Forward Contract has been booked but Forward Contracts provide certainty around the rate achieved, providing peace of mind and allowing for accurate budgeting to take place.
|Cost in GBP
*Rates taken are interbank exchange rates on the 1st Jan of each year. Source: Oanda
As seen with the example above, there are some years where booking a Forward Contract would have ensured a lower cost was secured in GBP when compared to the following year.
In other years, it would have proved better to wait.
The range in cost is quite significant – depending on the date the FX deal was booked, a €200,000 property could have cost anywhere from £167,928 to £179,762.
What about if I fixed a Forward Contract Jan 2022?
Using a Forward Contract to fix the exchange rate in Jan 2020 would have bagged you a comparatively better exchange rate than at most points during 2019-2023.
In Jan 2020 you’d have to part with £170,145 to acquire €200,000 – it would take some two years for that rate to be beaten in Jan 2022, when just £167,928 would be needed to buy €200,000.
By speaking with a specialist FX broker that provides Currency Forward Contracts, and has a dedicated team of FX currency traders, customers can get a better feel for when to trade and with what type of solution.
Whilst brokers aren’t able to provide direct advice, it might simply be that they inform you that the GBPEUR rate in Jan 2020 or Jan 2022 has moved to one of its most favourable points in the last five years for individuals looking to buy euro with sterling.
What’s the Cost of a Forward?
When it comes to Forward Contract, the pricing model is quire straightforward.
Use this Forward Rates Calculator to learn more.
List of All Companies Offering Buying FX Forward Contracts
Below you can find a finite list of all the companies we have covered and provide access to buying Forward Contracts for clients, small businesses and large corporations. Beyond simply booking a Currency Forward through them, these companies will also provide guidance about them. To execute Forward FX Contracts, you’ll need to speak to a currency dealer directly.
- Currencies Direct Review
- World First Money Transfer Review
- TorFx Review
- Moneycorp Review
- Currency Solutions Review
- Global Reach Review
- OFX Money Transfer Review
- Kantox Money Transfer Review
- Key Currency Money Transfer Review
- Privalgo Money Transfer Review
- Smart Currency Exchange Review
- PureFX Money Transfer Review
- Currencies.co.uk Money Transfer Review
- XE Money Transfer Review (XE.COM)
- Voltrex FX (VFX) Money Transfer Review
- EasyFX Money Transfer Review
- Halo Financial Money Transfer Review
- Afex Money Transfer Review
- AxiaFX Money Transfer Review
- SendFX Review
- Transfermate Money Transfer Review
- Frontierpay Money Transfer Review
- FinGlobal Forex Review
- Fiscal FX Review
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