If you’re planning to send money abroad, whether it’s buying property, paying overseas tuition fees or moving overseas yourself, you may have noticed how quickly exchange rates can fluctuate.
Even small changes can make a big difference, especially when transferring large sums of money. But using a forward contract can help give you certainty over your transfer amount and protect you from market volatility.
What is a forward contract?
A forward contract is simply an agreement to lock in an exchange rate today for a transfer you plan to make in the future.
By using a forward exchange contract, you know exactly what rate you’ll receive, even if the market moves in the meantime. This offers peace of mind, financial certainty and more control over your international payments.
For example, imagine you want to buy a property in Spain in six months’ time. The current GBP/EUR exchange rate is strong, but you’re not yet ready to make the transfer, and if the exchange rate were to weaken during those six months, it could eat into your budget.
You could use a forward contract to lock in the current exchange rate for your future transfers. No matter what happens in those six months, you’ll get the agreed rate.
It’s important to note that with a forward contract, you won’t benefit if the exchange rate improves. However, you will be protected from any negative shifts and you’ll know exactly how much you’re going to get, helping you budget and plan ahead without worrying that the exchange rate might suddenly weaken.
A forward contract is essentially a form of risk management, giving you certainty and control.
How do forward contracts work?
Forward contracts are flexible and can typically be arranged for up to one year in advance for personal transfers, or two years for businesses.
When you book a forward contract, you usually pay a small deposit to secure it. The exchange rate you agree at that point is then fixed for the future date you choose, so you know exactly what rate you will receive and when.
When the contract matures, you complete the transfer by paying the remaining amount, and your money is exchanged at the agreed rate, regardless of any market fluctuations in the meantime.
When and why would you use a forward contract?
Forward contracts are particularly useful whenever you want certainty about the cost of a future transfer, either to help you budget effectively or to reduce your exposure to risk.
Forward contracts for personal transfers
For personal transfers, this may be if you have a foreign payment to make in the future with a fixed sum, such as buying a property abroad or paying overseas tuition fees.
With transactions like these, it’s often important that you know exactly how much money you’re going to get, and forward contracts can provide this certainty.
Business currency hedging
Businesses or investors often use forward contracts as a form of risk management or currency hedging.
Because exchange rates are so volatile, sudden shifts can make cashflow unpredictable, which is a big headache for finance teams. Additionally, a sharp downturn in an exchange rate could lead to unexpected losses.
Forward contracts and recurring payments
Forward contracts can also be combined with our automated recurring transfer service, again helping to provide predictability by standardising regular payments. This could be regular business transactions or personal transfers, such as monthly pension payments.
By fixing the rate with a forward contract, you’ll know exactly how much you can receive each month and can keep your budget on track.
Are there any downsides or things to consider?
While forward contracts offer protection and certainty, there are a few important considerations to keep in mind.
First, once you agree to a forward contract, you’re committed to completing the transfer at the rate you booked, which means you cannot benefit if the market moves in your favour.
Second, the contract cannot be cancelled, so it’s best used when you are certain that the transfer will take place.
Because of these limitations, forward contracts are most effective when you have a clear plan and know the timing and amount of your transfer in advance. Understanding these factors will help you use forward contracts wisely and make the most of the financial certainty they provide.
Is a forward contract right for you?
In short, a forward contract is a simple, practical way to lock in an exchange rate for a future transfer, offering certainty and peace of mind. They’re ideal when you know you’ll need to send money abroad at a set time, and want to protect your transfer against currency fluctuations.
However, they’re less suitable if your transfer date is uncertain or if you want to take advantage of potential favourable movements in the market.
If you’re unsure about whether a forward contract is right for you, we can help. Our friendly currency experts can guide you through the options available and provide personalised support to help you transfer money in the way that’s best for you.
Contact the team today to talk through your transfer needs, or create a free Currencies Direct account online and an account manager will be in touch.
FAQs about forward contracts
Can I cancel a forward contract?
No. Once you’ve booked a forward contract, you’re committed to completing the transaction at the agreed exchange rate. This is because the provider secures currency in advance based on your agreement. If your plans change, contact your account manager to discuss possible options.
Can I book a forward contract online?
Not at the moment. Forward contracts are tailored to your needs and set up directly with a currency expert. You can, however, register for an account online and arrange your contract by phone.
How long can I lock in an exchange rate for?
You can typically lock in an exchange rate for up to year for personal transfers or when arranging recurring payments, and up to two years for a business transfer. Your account manager will confirm what’s possible when you get a quote.
Do I need to pay anything upfront?
Yes, a small deposit is usually required when you book the forward contract. The remainder is paid when the contract matures, when your transfer takes place.
What happens if the exchange rate moves in my favour?
You’ll still complete your transfer at the rate you agreed when booking the contract. While that means you won’t benefit from favourable movements, you’re protected against negative ones, giving you certainty and peace of mind.
