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Types of Contracts in Foreign Exchange
There are many methods of performing currency exchange. Fx-foreignexchange provide currency conversion services for corporations and private clients.
The types of currency contracts mentioned here apply to both business and private clients.
The following are just some of the methods we use to mitigate risk when helping our clients. If you are interested in becoming a client, registration with us is free, and here is no obligation to use our service as we are so confident that you will continue to use us once you have seen the benefits of our expertise.
To find out more about our business currency exchange services
A Spot rate contract.
A Spot Fx Currency Contract is a foreign exchange transaction based on a currency exchange rate at any particular time.
The rate of exchange at that moment is decided by the International market rates.
This is the way that most Company’s buy their currency, but it’s not necessarily the best way. If you believe that the rate is at it’s most beneficial at that very moment, then this is the correct solution, but most businesses seek a more planned strategy to their cash flow.
Forward currency contracts.
A “forward” allows you to protect your business against volatile market swigns n the currency rates that you wish to exchange.
Here are some of the benefits of a “Forward”:
- Fix the currency exchange rate. You can fix the rate of exchange now for either a payment, or receipt, for some date in the future.
- Individual solutions for your business. We can help to devise a currency exchange strategy that will work with your specific needs. Usually, this combines the requirement to retain cash for cash flow against the benefit of buying as much currency forward as possible.
- Certainty. This method provides your business with precise margins. You will not have to wait to see what the exchange rate does at some future point, or lose out by buying too early.
- Flexibility. It is possible to buy your currency using a method known as a “time option” on a standard forward contract. This allows your business to range your settlement dates. This is ideal if you are an importer, for example, and you don’t yet have specific dates of arrival.
Forward Plus Contracts.
A Forward Plus Contract has all of the benefits of a Forward foreign currency contract, but is designed to limit your foreign exchange risk, and to maximise the potential gains in spot rates of exchange.
Example: Your Company has won a contract to supply a company with goods over the next 12 months. These goods can be bought and supplied on a monthly basis.
They will have to be paid for in an alternate currency.
To safeguard your business from foreign currency fluctuations, you have based your profit margin on a particular rate of exchange. Fix that rate with a “Forward Plus Contract” to protect your business from the fluctuations in foreign exchange rates that may erode your profits over the year.
Your profit margin is then protected from currency fluctuations. All you have to worry about now is buying, supply, installation, payroll ……….!
If you are prepared to allow some flexibility then you may wish to consider an “Accrual forward”
Accrual Forward’s offer usually better rates for corporations that prefer to accumulate foreign currency over a given time period. This enables a company to accumulate foreign currency on a drip-feed basis at a rate that is better than the usual Forward Contract rate.
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