The basics of Currency Forward Contracts

What are Currency Forward Contracts?

If you posses a foreign payable that has the terms 30, 60, or 90 days, it is very likely that the price of that particular currency with change during these terms. You can avoid the risk the fluctuating exchange rate with a forward contract. This is a lock-in for the same exchange rate you purchase the foreign payable for when making a transactions at a later date. This helps companies manage the risk of foreign investments. Forward contracts are available for purchase for any of the major currency pairs, and some minor, in a variety of sizes.

However, most will not extend past one year.
To simplify, a forward contract is a contract that specifies the price and quantity of an asset to be paid in the future. This locks-in your future purchase price.

Positives
• Stabilizes risk
• You cannot lose money
• Ability to make multiple payments to suppliers at same exchange rate
o You can make several smaller payments, or one lump sum payment at the same exchange rate
• Forward contracts allow more efficient and effective management of finances

Negatives
• Unable to gain money
• A security deposit is often require to secure the contract

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