What is a forward contract?
Think of a forward contract as a ‘‘buy now, pay later approach.’’ A forward contract let’s you lock in today’s exchange rate, for delivery at a pre-determined date in the future. Foreign exchange suppliers will require you to put down a deposit i.e. 10% and are typically offered for up to 12 months in advance.
The main benefit of booking a forward contract when making an international payment is your ability to hedge against adverse currency fluctuations.
A couple used cases include:
- If you are buying an overseas property, it’s likely you will be working towards a budget. Booking in a forward contract for your dream property in Spain or France will ensure that the price of your property always stays within budget.
- Perhaps your business requires you to make an international money transfer due in the future or several payments throughout the year. By fixing today’s exchange rate, you ensure profit margins are not squeezed in the event of adverse currency exchange rate movements.