Types of Forward Contract

published on 14 September 2022

5-minute read

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The Basics

A forward contract is an agreement to buy or sell one currency for another at an agreed rate and at an agreed future date. 

Forward Contracts allow you to secure exchange rates for future exposures and minimise the impact of currency fluctuations and market volatility.

The exchange rate on a Forward is typically higher or lower than the Spot rate – this is due to the interest rates of the two currencies involved. Read more in our blog post on forward pricing or feel free to call, DM, or email us with any questions

Forwards are favoured by treasurers and FDs/CFOs for their simplicity, availability, flexibility, and certainty they provide.

The Benefits of Forward Contracts

Unlike most FX firms, we take a truly client-first approach and we believe that the decision to hedge or not is unique to each business. If currency hedging is appropriate and would help a business to reduce risk and achieve its objectives, then forward contracts will likely play an important role in the strategy.

  • Certainty – Guarantee the exchange rate for future payments or receipts
  • Predictability – Securing future conversion rates makes cash flows predictable
  • Flexibility – Some contracts can be used at any time before the maturity date
  • Simplicity – Trade quickly online, in any size, and in most currencies

Types of Forward Contract

The basics apply to all contracts – a set amount, rate, and future maturity date, but there are three main types of contract to be aware of:

  1. Fixed: Settlement is restricted to one future date only
  2. Open: Fully flexible, allowing settlement at any time up to the maturity date 
  3. Window: Can be utilised within a window of time up to the maturity date

The open forward gives the most flexibility for drawdowns and utilisation, but it can come at a price: The reason we provide the three types of contract is that the forward rate is influenced heavily by the length of the contract and the size and sign (positive or negative) of the interest rate differential of the two currencies involved.

A quick example:

  • An Irish company imports from China in USD (so they sell EUR to buy USD)
  • They have an invoice of $500K to pay in 6 months' time
  • The spot rate is EUR/USD 1.0000, and the 6m swap points are +0.0120
  • Open Forward exchange rate is quoted at 1.0000, $500K costs €500,000
  • Fixed Forward exchange rate is quoted at 1.0120, $500K costs €494,071

If in doubt, you should speak to your FX dealer about forward pricing and which solution would be best for your needs, balancing flexibility and market pricing.

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Forward with Oku Markets

Oku Markets provides live forward contract trading to clients online and via our telephone dealing desk. We always give our customers fixed, consistent, fair, and transparent FX prices, so you can trust us to work with you, not against you!

Contact us at [email protected] or 0203 838 0250 to discuss your needs!

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