What is a Forward Contract : A Guide for Businesses

Take a look at our guide to forward contracts and find out more about how a forward contract could improve your business’s bottom line.

What is a Forward Contract?

Forward contracts are a hedging product that help businesses to protect themselves from potential currency market volatility by fixing the rate of exchange over a set period on a pre-determined volume of currency. They allow two parties to exchange a specified amount of one currency for another at a pre-determined exchange rate on a set future date.

This type of contract is particularly useful for businesses that need to manage the risk associated with currency fluctuations, especially when managing multi-currency budgets. You can enter into a forward contract with Fiscal FX to facilitate payments for specific goods, services, or direct investments.

By taking advantage of forward contracts, you’re able to secure a currency at today’s price for a specific date in the future, up to five years away

How does a Forward Contract Work?

Forward Contracts Example
Forward Contracts Example

Why are Forward Contracts useful for businesses?

It’s always important for businesses to consider the commercial implications before committing to using a forward contract. Here are some examples of where a forward contract might be useful for a business:

1. Paying Invoices: To hedge or lock in a rate to cover an invoice that is dated in the future.

2. Securing Supplier Costs: To hedge a rate to cover a percentage of forecasted currency requirements for future supplier payments when importing goods or raw materials from overseas.

3. Facilitating Long-Term Contracts: To hedge a rate for long-term clients or suppliers who are paid in installments. By locking in the exchange rate, businesses can confidently commit to long-term pricing agreements, enhancing trust and stability in business relationships.

4. Protection against market volatility: To provide a safeguard against forecasting exporting revenue from currency volatility, ensuring that businesses are not adversely affected by sudden and unexpected changes in exchange rates.

5. Competitive Pricing: To set prices for goods and services without worrying about currency fluctuations eroding your profit margins, thereby maintaining competitiveness. Being able to offer stable and predictable pricing is a significant advantage.

6. Budgeting: By fixing the exchange rate in advance, you can more accurately predict future cash flows. This aids in budgeting and financial planning, allowing for better allocation of resources and more informed financial decisions.

4 things you also need to consider when opting for a Forward Contract

Forward Contract Consideration Reason
Forward Contract Consideration Reason
Forward Contract Consideration Reason
Forward Contract Consideration Reason

What are the main benefits of Forward Contracts?

Certainty over profit margins: A rate can be fixed, providing SMEs with certainty over their profit margins. By locking in the exchange rate for the entire duration of the forward contract, buyers are assured of a guaranteed rate of exchange.

Hedge at a Fixed Rate: If the live market rate moves against the SME’s favour they will not be negatively impacted as they have hedged at a fixed rate. This protection is crucial for companies engaged in international trade, as it ensures predictability in the cost of FX transactions.

Credit Lines: A deposit is usually required, but speak to your portfolio manager about your cash flow situation and we may be able to assist. With Fiscal FX, SMEs can lock in a rate without tying up any liquidity by using our trade finance solutions. Our team of helpful FX specialists and 3rd party credit rating providers can set up credit lines on an individual basis to cover initial deposits.

Talk to one of our Portfolio Managers about Forward Contracts for your business.

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