What is a Currency Forward Contract?
A Currency Forward Contract is very simple. It is a legal contract to buy a certain amount of currency or currency pairs at an agreed rate on a future date. You would normally pay 10% of the money now, as a deposit, and agree to pay the remainder within the next 12 months.
What is the benefit of a Forward Contract? Because a Currency Forward Contract locks in your exchange rate for that period allowing you to know your future costs.
What are the benefits?
Avoid the risk of currency rates fluctuations
Avoid the rush on the day of your payment – everything is already in place!
Easy budgeting as you know exactly how much it will cost
Pay it all at once, or spread the payments out over multiple transfers
You book now, but pay later
Safe and secure payments, authorised by the FCA
Frequently Asked Questions
An example of how a Currency Forward Contract can help you:
A Forward Contract will reduce the uncertainty when buying a oversea property. Suppose you are buying a villa in Spain for €200,000 but won’t be paying the money for a month or two while the lawyers sort out the legal side. If you are paying for it in euros but are currently holding your money in pounds, any rate changes in the meantime will change the price of the property. Even a 1 percent loss in the value of the pound – and that can happen in a day – will send your property rising in price by thousands of euros.
Using a Forward Contract will protect that from happening. It can also protect your income when you live abroad too.
When can I use a Currency Forward Contract?
A Forward Contract helps you stay in control over the exchange rate, which is the price you’re paying for foreign currency. The exchange rate fluctuates constantly, affected by political and economic events each day. One minute your pound is looking good against the dollar and euro, the next it falls in value and that dream property slips beyond your price range. But a forward contract can fix your cost in advance. If you know that you will need to make a large payment abroad in the coming year, or a number of payments, a Forward Contract could be the best service for you.
How does a Currency Forward Contract work?
A Currency Forward Contract lets you lock in an exchange rate for up to 12 months. You might take this option if you have paid a deposit on a property abroad as your final cost could exceed your budget when currency is fluctuating. It allows you to reserve foreign currency when you feel the currency you have is strong, or vulnerable to weaken.
With the contract signed, and your 10% deposit paid, no matter how the currency values fluctuate, you will always be able to trade at the agreed rate. You might use one if you are making a regular payment every month; for an overseas mortgage perhaps, or stage payments on a new-build. Without a Forward Contract, a monthly payment of €10,000 will vary by hundreds and even thousands of pounds each time you make it.
Currency Forward Contracts for regular payments
Forward Contracts can also be teamed with one of our Regular Payment Plans. If you need to make payments frequently or at regular intervals, for example for a pension payment or to cover an overseas mortgage, you can use a Forward Contract to lock in a rate for these regular payments for the year ahead.
This allows you to budget for the amounts coming in and out of your account, and ensures you’re never left short. Combining a Forward Contract with one of our Regular Payment Plans removes hassle from these transfers and set up is simple. Your trader will help you lock in a satisfactory rate, you outline the dates the payments need to be made and then set up a standing order to cover them. Your payments will then be managed on your behalf for the next 12 months at the rate you’ve agreed. This combination of services is the best way to effectively manage your regular payments to help you budget, and to give you complete peace of mind.
Is a Currency Forward Contract right for me?
Forward Contracts work well for many of our clients. For example, those making one-off payments who want to avoid currency risk and be certain on their currency prices. Forward Contracts are also great for those who feel that rates are at a good level, or that they could weaken significantly, and they want to take advantage of that favourable rate for a year.
There are pros and cons for using a Forward Contract. Currencies can move in both directions, if the source currency strengthens after agreeing the contracting rate you are still legally obliged to trade at that level. If you only need to make a one-off payment, a Spot Contract works well. Your trader will secure you the best exchange rate possible on the date you need to make the transfer. As there is no time delay, the currency risk is much less and a Forward Contract unnecessary. However, if you are committed to buying and have a set budget, a Forward Contract will work well.
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