What is a forward contract and why would I need one?

Business finance
Thanim Islam

With recent global events such as the pandemic and most recently the instability of sterling following recent politics, it’s more important than ever to be aware of fluctuations in the foreign exchange market regardless of whether or not your business trades or makes payments internationally.

Even if a company doesn’t trade internationally, if they operate within a globally competitive industry, changes in exchange rate pairs can still affect operating profits. One way to manage the risk associated with foreign exchange is to book a forward contract.

Read on to learn more about forward contracts and why you and your business need them.

About Equals Money

What is a forward contract?

A form of currency hedging, a forward contract is an agreement in dealing with foreign exchange that guarantees, or “locks in'', an exchange rate for the sale or purchase of a specified currency for up to 24 months in the future. When trading internationally for your business, a forward contract with Equals Money can mitigate the risk around currency transactions. If the rate is in your favour when the contract is agreed, you are guaranteed that rate for the agreed time of settlement.

Although should the rate continue to move favourably after the contract has been agreed, you’ll still receive the original agreed exchange rate, presenting a potential disadvantage in choosing a forward contract. However, many customers find the stability offered by a forward contract outweighs this disadvantage.1

Why would I need a forward contract?

Over the last two years, businesses have faced tough trading conditions. The pandemic caused an exponential rise in shipping container costs and a surge in commodity prices while FX markets saw high levels of rate volatility.

Learn more about rate volatility and what it can mean for your business here

Nb: The Baltic dry index is an index of average prices paid for moving major raw materials by sea
Source: Bloomberg Finance L.P.

These levels of high volatility can add another potential headache for businesses when it comes to the impact on their bottom line.

By having an appropriate hedging strategy and using forward contracts, businesses can add another layer of protection to their bottom lines and mitigate risk when dealing with transactions across multiple currencies.

Forward contracts are a form of currency or FX hedging that allow a business to fix an exchange rate now for a requirement to buy or sell currency in the future. At Equals Money, we can offer contracts on most currency pairs up to 24 months in the future.

This hedging tool allows you to take advantage of favourable exchange rates, protect yourself against adverse currency moves or market volatility, apply exchange rates to future cash flows, budget efficiently, and plan for future sales.

Why a forward contract?

At Equals Money, we believe that FX hedging should be transparent, easy to implement, and should increase certainty on FX pricing. Forward contracts meet all these requirements.

Making international payments with Equals Money

Using forward contracts within a bespoke hedging strategy allows businesses to focus on business. While we help to mitigate the impact and risk associated with FX volatility, you can get back to what’s important: growing your business.

With Equals Money, you'll receive the support and expertise of a specialist currency account manager who can help you put together a strategy using a range of ideas for overseas payments, including forward contracts, bespoke currency hedging, and more.

1Equals Money can only offer forward contracts to facilitate payments for goods and services

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