When doing international business, exchange rate fluctuations can put your bottom line at risk. Forward contracts enable you to fix an exchange rate for a set amount of the chosen currency for a future transaction to manage your currency exposure.
This way, you reduce uncertainty, budget better, and optimise your profit margins when paying or receiving invoices in foreign currencies.
Benefits
Protection: Lock in a fixed exchange rate for your payments and receipts, minimise the impact of FX rate fluctuations and optimise your profit margins.
Visibility: Provides visibility of future payments and collections, enabling you to better manage your future global cash flows and budgeting.
Efficiency: With a fixed exchange rate, you worry less about the exchange rate movement and focus more on your core business.
Simplicity: Forward contracts are straightforward and allow you to trade in any size or currency.
Bespoke: You can tailor your strategy based on your needs, price, delivery date, and quantity.
Additional considerations
1. Obligatory in nature
In most forward contracts, once you agree to the contract terms, you are obligated to fulfil them at maturity, even if market conditions are more favourable. However, in a few scenarios, you may have the flexibility to roll over positions depending on your case.
2. Margin call
In case of adverse currency swings, you may be required to pay a margin call that will be held against the contract. This amount will be fully refunded when the contract is fully utilised or at maturity. Margin calls may vary depending on your credit conditions.
Example
Suppose you are an importer based in the UK and wish to buy goods worth 50,000 USD six months from now. The current GBP/USD is 1.20, and you have budgeted your cash flows assuming this current rate. You worry that the rate may depreciate to 1.10 in 6 months and want to protect your profit margins. If the rate drops to 1.10, instead of 41,666.67 GBP, you must pay 45,454.54 GBP, an additional 3,787 GBP.
That's where the role of forward contracts comes into the picture. Let's say you enter into a forward contract with Ebury and lock in a guaranteed exchange rate of 1.20 for a period of six months. On maturity, you pay 41,666.67 GBP to Ebury and receive 50,000 USD.
Forward contracts designed around your business
At Ebury, we offer different types of forward contracts to give you the flexibility and choice to decide how you want to trade.
*Note: Ebury offers window NDF synthetics in many currencies. Get in touch with us to learn more.
Disclaimer: The provision of some FX Products listed here is restricted to certain jurisdictions. Please get in touch with us to learn more about the products available in your country.
Why choose Ebury?
- Enjoy best-in-class credit conditions.
- Hedge up to a maximum of eight years.
- Manage your currency exposure in 60+ currencies.
- Tailored strategies to meet your needs and goals.
- Competitive FX rates to help you save money.
- Get dedicated support from start to finish.
