Forward ContractsIf you are making lots of regular payments, or if you're unsure on the exact date a payment needs to be made, a Forward Contract could be perfect for you. You can lock in an exchange rate for the next 12 months, and avoid the risk of exchange rates moving against you. Find out more
What is a Forward Contract?
A Forward Contract is very simple. It is a legal contract to buy a certain amount of currency at an agreed rate in the future. You would normally pay 10% of the money now, as a deposit, and agree to pay the remainder within the next year.
Why would you do that? Because a Forward Contract locks in your exchange rate for that period.
An example of how a Forward Contract can help you:
Suppose you are buying villa in Spain for €200,000. You know you are buying it, 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, if the rate changes in the meantime the price of the property to you will change too. 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.
A Forward Contract will protect that from happening. It can also protect your income when you live abroad too.
The benefits of a Forward Contract
The major problem of overseas payments is the lack of control you have 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 If you are planning ahead and 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. It lets you lock in an exchange rate for the next 12 months. You might take this option if you have paid a deposit on a property abroad and are worried that the pound could weaken, leaving you out of pocket when you pay the balance. It allows you to reserve foreign currency when you feel your own currency is strong. 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. Forward Contracts work well for many of our clients. For example, those making one-off payments who are concerned with what uncertain times might do to the currency market. 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.
Forward Contracts for regular payments
Forward Contracts can also be teamed with one of our Regular Payment Plans. If you need to make regular payment, 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 year 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 gift you complete peace of mind.
Should I use a Forward Contract?
There are downsides to Forward Contracts too. Most obviously, 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.
Download a free guide
Open an account today
Gain access to one of our dedicated currency traders and get expert guidance on the best way to manage your transfers by registering for an account. All guidance is provided for free, no payment details are needed and there is no obligation to use us.