Markets

Forward Contract

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An agreement between two parties to exchange one currency for another at a pre-agreed date in the future. The rate is calculated using the spot rate and a forward point adjustment for the tenor of the contract. The pre-agreed rate will remain fixed regardless of appreciation or depreciation of the currency pair during the period.

How it works

UK-based company Acme Ltd is making a machinery purchase from a US company in 6 months. They would like to hedge against adverse currency fluctuations for that time period to ensure clarity of their costs. To do so, Acme Ltd executes a Forward Contract:

Variables

Key benefits

Protection against adverse movements at a predetermined rate, adding clarity on future cashflows

Tailored to specific objectives, giving flexibility to decide the notional amount, currencies and the settlement date

Settlement of the contract is not required until the agreed settlement date, supporting cash flow management

Key risks

  • You are obliged to fulfil the agreed terms under the FX forward contract entered into even if your requirements change during the term of the FX forward contract
  • Should the contract no longer be required, the cost of unwind (which may be substantial) will be determined by the prevailing market rate at the time and be payable by the client
  • Unable to participate in favourable market movements with respect of the contract
  • The mark to market value of the contract will become positive or negative throughout the duration of the contract in line with market fluctuations
  • By entering into a FX forward contract with us, you become subject to our credit risk in respect of our ability to perform our obligations under the FX forward contract. You will not receive any payment or delivery under the FX forward contract if we become insolvent or otherwise unable to pay or deliver

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