Forward Currency Contracts for Money Transfers

With USForex, almost anyone can hedge their forex rate risk by using a forward currency contract. A forward currency contract is an agreement by two separate parties (e.g. USForex and its clients) to buy or sell a currency at a predetermined exchange rate in the future. Essentially, forward contracts allow anyone to freeze an exchange rate for future use.

Example of How a Forward Contract WorksVancouver Cabin

Let’s say Joe, who lives in Arizona,  wants to retire in a year. He desires to buy some real estate in Canada. Joe finds the perfect location in Vancouver and meets with the Canadian seller Sarah. They negotiate the price of the real estate and both agree that Joe will pay $500,000 Canadian Dollars a year from now. The current exchange rate at the time of the deal is US$1.00 = C$1.00. Joe expects to pay $500,000 U.S. Dollars for the property.

First Possibility - Joe Doesn't Use a Forward

A year’s time passes and Joe is ready to pay for his property in Vancouver. Only now the exchange rate has moved unfavorably for Joe, US$1.00 = C$0.95. Joe’s new property will cost him $526,315. That is  $26,315 more than he originally planned on paying.

Second possibility - Joe uses a Forward

A year’s time passes and Joe is ready to pay for his property in Vancouver. The exchange has changed to US$1.00 = C$0.95. Joe isn’t worried though as he bought a forward contract right after he negotiated the price with Sarah. Joe’s forward contract cost him 1% off the total amount to be exchanged, US$500,000.

Result

US$526,315 (the future price) - US$500,000(expected price) – US$5,000(Forward Contract cost) = $21,315

Joe saves himself more than $21K by thinking ahead  and protecting himself with a forward currency contract. If the exchange had gone the other way in Joe's favor, he would only be out $5,000, the cost of the forward. Accordingly, forwards should be used by people who want to minimize potential losses and are willing to pay a small margin for that peace-of-mind.

How is a Forward Rate Calculated?

The forward price is calculated by adjusting the current market rate (the spot rate) for "forward points", which take into account the difference in interest rates between the two currencies and the time to maturity. The forward points are based on a formula which is standard industry practice.

Minimum Forward Contract Amount

USForex loosely sets a minimum contract amount of $30,000. Most customers won’t see the full benefit of a forward if they send less than $30,000.

Maturity Dates of Forward Contracts

Because forward contracts are set for the future, you’ll need to pick a specific date for settlement. USForex offers forwards with settlement maturity dates of 2 days to 12 months from the present.

When does Money Change Hands?

You do not have to pay the full amount on the forward until the future maturity date. There may however be a small deposit required at the commencement of the forward transaction and/or at a later stage prior to the maturity date. This holding deposit can run between 5%-15% depending on the volatility of the market.

What Currencies can you use with Forwards

While it is technically possible to write a forward contract for any currency, the lack of liquidity for exotic currencies means most forex providers don't deal with exotic forwards.  Accordingly, USForex is able to offer forwards on the following currencies:

 - Euros DKK- Danish Krone SEK - Swedish Krona
C$ - Canadian Dollar ¥ - Japanese Yen S$ - Singapore Dollar
£ - British Pound Sterling HK$ - Hong Kong Dollar R - South African Rand
zł - Polish Zloty NOK - Norwegian Krone  
CHF - Swiss Franc NZ$ - New Zealand Dollar  


If you would like a quote for a forward exchange rate or just want to know more about forward rates please call one of our foreign exchange experts, available 24 hours a day or Register for Free.

U.S. Free Call 1 888 288 7354
Australia Free Call: 1300 300 424
Canada Local Call: 1 800 680 0750
NZ Free Call: 0800 161 868
UK Local Call: 0845 686 1950
International: +61 2 8667 8090


 

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USForex Inc. dba OFX (“USForex")

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