Reduce your risk with a currency forward

Currency brokers can lock in a favourable exchange rate for settlement up to a year in advance on a “buy now pay later basis” with a currency forward contract.

Using currency forward contracts can help predict cash flow and futures costs without the worry of currency prices moving against you.

For example you have £12m to convert into EUROs over the course of a year (£1m a month), but are worried that the exchange rate may move against you, therefore reducing the amount EUROs you receive as time goes on. We can convert £12m up front and split it into 12 different settlement dates a month apart. A small deposit would be required of between 5% and 10% but the balance of each transaction would not be due until the currency is needed and the conversion settles.

As an example, say the GBPEUR price moved 6.73% over 6 months – this kind of change would have a big impact on the receivable euro amount.

Prior to the change, converting £1m GBP would have been worth EUR 1,425,00.

Doing so after the rate changes £1m is worth a lower value of EUR 1,315,400.

Currency prices change frequently and some move up to 10% in 6 months. Timing your transaction correctly, when the rates are in your favour, could save you as much as £10,000 on a £100,000 transaction.