Make sure you understand the business risks of forward contracts
Currency forwards are one of the cheapest and easiest ways to hedge currency exposure.
The important thing to remember is that they are a hedge, not a speculative position. Currency forwards are there to reduce risk.
However, it is very to see how forward contracts can be beneficial but slightly harder to see the business risks of forward contracts.
Here are the main business risks of forward contracts
- The offer no upside if the exchange rate moves in your favour
- A deposit is require to cover potential market moves
- Currency forwards must be settled (however they can be rolled over or drawn down at a cost)
You may also be interested in these sections:
- Compare currency brokers
- What are currency forwards?
- Currency forward quotes
- FX forward pricing
- Currency forward rates
- Currency forward contract pricing formula
- Forward exchange contract advantages and disadvantages
- Advantages and disadvantages of future contracts
- Advantages and disadvantages of forward contracts and currency options
- Advantages and disadvantages of option contracts
- Advantages and disadvantages of money market hedge
- Business risks of forward contracts
- Advantages of futures and forwards
- Currency hedging forward contracts