What are currency forwards and how do they work?

Currency forwards are very simply a buy now, pay later form of currency transaction.

Most decent currency brokers offer this service as standard, so here we look at a few things to look out for to make sure you get the best currency forward deal.

How do they work for you?

Basically, you convert money either online or over the phone as though it was a normal same day conversion. However, as the settlement date will be in the future the pricing will be slightly different. It may be in your favour or against you depending the interest rates of the two currency countries.

So, for example if you want to lock in the current GBPEUR rates for a purchase of 100,000 Euros, you would buy 100,000 Euros, but instead of paying the GBP you only pay 5% as a deposit, then the balance when the trade settles, this could be any point up to a year in advance for most currency forward brokers.

Main advantage is reducing risk

If you are budgeting you can use a currency forward to lock in profits on a foreign transaction or make sure that an upcoming foreign property purchase does not cost you more than the currency exchange rate.

Currency forwards generally shouldn’t cost any more in (exchange rate) fees than a normal transaction.

Missed opportunity is the main disadvantage

If you buy currency early then you miss out on exchange rates potentially moving in your favour. Of course, no on can predict where a price may be in the future so with large foreign exchange transactions it often prudent to err on the side of caution.

What to watch out for

Live forward exchange rate quotes are not really available online, so the best thing to do it open an account with an online foreign exchange broker and request quotes using their online platform as and when you need them.

Sometimes a countries exchange rates can act in your favour and the more commission hungry brokers will on occasion not offer this price improvement to customers, instead giving the actual spot price rather than the forward rate.

To find the best exchange rates you can compare currency quotes here

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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.