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)

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