Secure an Exchange Rate
Forward contracts, are a simple risk management solution that allows you to secure an exchange rate today, but for settlement at a specific date in the future. The exchange rate is secure on the day that you come to an agreement, fixing the buy and sell amount, as well as the date on which the contract will mature. If you want to protect your foreign currency exposure from volatility then FX forwards is an effective hedging tool when it comes to future payments.
There are different types of forward contracts available. The following contract types can be ideal for certain situations, but you should ensure you speak with a specialist, such as NewbridgeFX, who can explain what the best option is for your particular situation.
Fixed forward contracts
Makes it possible to exchange one currency for another on a fixed date in the future. You secure the exchange rate today, and settle the contract (i.e. transfer your money), on a specified date in the future.
Open, flexible, or variable FX forwards
Makes it possible to exchange currencies, and secure an exchange rate today for settlement on a specified date in the future. Yet with these options, you would also be able to draw-down and use some, or all, of the contract before the original settlement date. This is useful if you may need to send funds, or have access to the funds, before the agreed future date.
Non-deliverable, time options & window forward contracts
There are other types of FX forwards such as NDF’s (non-deliverable forwards), Time Options, and Window contracts, which are less common but may be suitable for you. Speak to NewbridgeFX for further information.
A company buying goods from a supplier in 6 months time.
A large furniture company forecasts that they will be buying $100,000 USD of goods from their supplier in 6 months’ time.
To protect against uncertainty from currency fluctuations, the furniture company requested a quotation for a forward contract with NewbridgeFX.
The spot exchange rate for GBP/USD was 1.36 which came to a cost of £73,529 GBP to exchange to
The company decided to secure the spot exchange rate for the fixed price and settle the contract (i.e. transfer the money) on the agreed settlement date in 6 months’ time.
In the following months the exchange rate changed significantly in a negative direction to 1.12. Had the furniture company not drawn up a forward contract with NewbridgeFX, they would stand to lose over £15,756.
The forward contract enabled them to reduce their exposure to the currency fluctuation and make payment at a rate which ensured their profits were not affected.
Once you register an account, you can ask for a FX forward to buy a specific amount of currency, at a specified date in the future. If you confirm you want to proceed the contract becomes an agreement between both parties, and the exchange rate is secure and locked in. You would need to transfer a deposit, held as a balance against the contract (5% of the value of the contract is common). When the settlement date (otherwise known as the maturity date) arrives, you transfer the remaining balance to our account. Once received we will transfer the agreed amount of currency to your nominated beneficiary account. The contract agreement is then finalised.
There are no costs, or transfer fees to secure a forward contract agreement. The buy and sell amounts would be secure and fixed for the duration of the contract.
In simple terms, interest rate differentials between two currencies determine a forward contract exchange rate. They are not a forecast of where the rates may be in the future. If you are selling a currency where the country has a lower interest rate, compared to the buy currency/country, then the forward rate will be higher than the current spot rate, and vice-versa.
As a forward contract secures the exchange rate and fixes the buy and sell amounts, it does mean you cannot take advantage of the rates if they continue to rise and become even more beneficial for you. A forward contract protects you if the rate declines, but you cannot benefit if the rate continues to improve and moves more in your favour.
While forward contracts can protect against the exchange rates declining over time, you cannot take advantage if the rate continue to rise. As a result, there are various hedging strategies to utilise, such as securing 50% of the total value as a FX forward, with the remaining value booked as a spot contract at a later date. You could also use Market Orders to secure the remaining 50% value should your desired rate be obtainable in the future; but Market Orders will only execute should your desired rate be achievable in the market, and are not guaranteed. NewbridgeFX can help you set an appropriate risk management hedging strategy to help you achieve your objectives.
NewbridgeFX offers a specialist service in the deliverable foreign exchange market, promoting a range of products and services, available online or over the phone. Our products have been designed to meet the needs of our clients. A lot of these products are ways for businesses, and individuals, to manage and mitigate currency risk, and are used frequently during times of increased volatility. Alongside up to date market news, which works in tandem with our range of products.
We strive to earn the loyalty of our clients by consistently delivering a dedicated, professional foreign exchange service, and focusing on providing a great client experience. We have a vast and varied client portfolio. Our experience and expertise in managing international payments applies across a wide range of industries, from accountants to warehouses.
I have been using NewbridgeFX for a number of years now to transfer money between the UK and the USA, they have been amazing. I can always get hold of someone on the phone and they are very knowledgeable, friendly and helpful. I would recommend them to anyone looking to make international transfers.... Read More
Great exchange rate, helpful and knowledgeable service and fast transfer to a French bank account. Highly recommended.
best FX in town, I trust him a lot
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