If you want to hedge your currency exposure a currency forward is one of the simplest and most accessible ways to do so.
A currency forward basically means that you lock in the currency exchange rate for up to a year in advance. A small deposit is required to cover an currency fluctuations before you pay for the full amount on settlement.
But what are the mail forward exchange contract advantages and disadvantages?
Forward exchange contract advantages
The advantages are clear, the most obvious being you can stop things costing you more, or make sure you don’t lose out on foreign currency due at some point in the future.
- Buy now, pay later
- Lock in the current exchange rate for a future purchase/receipt
- Hedge your exposure and reduce your risk
- Very simple to set up
- Inexpensive to maintain
- You can draw down to get currency early
- You can rollover f you don’t need funds until after the original settlement
Forward exchange contract disadvantages
The main disadvantage is of course hindsight. One thing to bear in mind when looking at currency risk protection is that hedging can work against you. However, there are only a few disadvantages, compare to the protection that a currency forward provides.
- If the currency moves in your favour you have missed the gains.
- Small deposit required still ties up capital
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