Forward Contracts for Money Transfers

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A Forward Exchange Contract (FEC) or simply a 'forward' is a contract between UKForex and yourself to buy one currency in exchange for another at a specified future time at a price agreed upon today. This is different to a spot contract, which is an agreement to buy or sell today. Put simply, it's an opportunity to 'buy now and pay later'.

Example of How a Forward Contract Works

Sarah, who lives in Manchester, is looking to buy some property in Australia. Sarah meets with the current owner of the house and they agree that Sarah will pay AUD $500,000 6 months from now. The current exchange rate at the time of the deal is GBP £1.00 = AUD $1.88. Sarah expects to pay GBP £265,957 for the property.

First Possibility - Sarah doesn't use a Forward contract

Six months' passes and Sarah is ready to pay for the property in Sydney. Only now the exchange rate has moved unfavourably for Sarah, GBP £1.00 = AUD $1.65. Sarah's new property will cost her £303,030. That is £37,073 more than she originally planned on paying.

Second possibility - Sarah uses a Forward contract

Six months' passes and Sarah is ready to pay for her property in Sydney. The exchange has changed to GBP £1.00 = AUD $1.65. Sarah isn’t worried though as she bought a forward contract right after she negotiated the price with the owner.

Result

Sarah saves herself more than £37,000 by thinking ahead  and protecting herself with a forward currency contract

Examples of what a Forward Contract can be used for:

  • Property purchase with completion date set in the future
  • Investments
  • Sending large sums of money back home

Benefits of using a forward contract

  • Manage your cash flow
  • Budget effectively
  • Focus on enjoying life rather than worrying about daily FX movements

How it works

  • The forward rate is calculated by adjusting the current market rate (the spot rate) for "forward points", which take into account the difference in interest rates between the two currencies and the time to maturity. 
  • The forward points are based on a formula which is standard industry practice; this is not an extra margin charged by UKForex 
  • You do not have to pay the full amount owing on the forward exchnage contract until the maturity date. 
  • A deposit is required at the commencement of the transaction and/or at a later stage prior to the maturity date.

If you would like a quote for a forward exchange rate or want to know more about forward rates please call one of our dealers.

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