Forward contracts – what is all about?
More and more people are opening a foreign exchange account, and one of the products they are becoming more interested in is forward contracts.
A Forward Contract is a way of locking in at a desired exchange rate to avoid any risk of movement in the future. We highly recommend our customers who are trading regularly to consider this option.
So how does it work? This is an agreement where you buy currency on an agreed future date at a fixed exchange rate. This allows you to take advantage of a favourable rate at present for your future trade (for up to 1 year). You can draw down on it whenever you need to. You will be required to pay a 5% deposit to secure this. This is not a fee but part of the transaction value.
What kind of payments would be recommended for Forward Contracts?
There are many instances, but we find that home owners with a property abroad can save a lot of money. Not only do they save money, they are sure that their funds will be available for payments that have a time schedule.
- Purchasing a property – in order to protect and have peace of mind that the price of your house purchase does not change, then buying a forward contract and blocking a rate guarantees that you retain the price you have budgeted to pay.
- Urbanisation / Property Complex and Maintenance Fees – it is vital that these payments are made on time and of course they fall into the bracket of regular payments. These payments could be quarterly or monthly but without doubt an important payment for home owners.
- Stage payments on new build property – these payments have a time frame, and it is imperative that the funds are in place and ready to cover the payment, so by using forward contracts, these payments can be planned for and avoid fees incurred by late payment.
- Building Contracts – many property owners buy renovation investment property, the builders will be preparing various parts of the labour and purchasing material, so accordingly the payments have to be made.
- School & University Fees – parents with children attending educational facilities in other countries will have different payments to cover, such as equipment, accommodation and transport. However, the educational fees are often paid annually, so by using a forward contract a family can save money and plan for the years ahead.
- Pensions, mortgages and other regular payments – With rates as volatile as they are now it could be wise to block a rate for 6 months to 1 year to cover all your regular payment costs. This gives you the ability to know your monthly costs with no added surprises!
Forward Contracts – is this a product for businesses?
An importer of foreign goods requiring to make a payment at a specific period of time may contract to purchase foreign exchange in advance, this is to avoid the risk of changes in exchange rates. This can have a big impact on the business and ultimately determine the end price of the product.
What risks are business traders avoiding?
If the traders wish to avoid the risks and to concentrate on their normal functions (i.e., trading activities), and the risks involved in these, they can contract in advance to buy or sell foreign exchange, equivalent to the amount of payment they expect to make or receive at a guaranteed rate.
For example, an importer placing an order for goods from the United Kingdom, knowing that he has to make payment in terms of sterling after ninety days, can contract with Elys Fx in advance to buy sterling after ninety days at the guaranteed exchange rate and thus safeguard himself from the risks arising from the changes in the exchange rates.
For more details on our Foreign Exchange Services and Products please visit our website or call to speak to one of our experienced members of the team.