In this article, we aim to break down the complexities of one of the most underrated forex products available in the market. Forward buying is often neglected because people don’t understand, how it works, why it should be used and when it should be used.

What is a forward contract?

A forward contract is an agreement to exchange currency at a future date based on a price agreed today. This is quite simply a buy now pay later solution.

How does it work?

A forward contract allows you to fix and hold the exchange rate for up to 6 months in the future. The exchange rate you get is based on the market rate today (SPOT RATE) but includes forward points which are calculated based on interest and time.

It sounds complicated but don’t worry our system will work it all out for you based on the dates you select. To secure the rate, you will need to put down a deposit of up to 10% of the volume being purchased with the balance being due on or before completion.

Why should I buy currency forward?

If you need to make a payment at some point in the future and don’t want to risk the exchange rate moving against you, then buy your currency forward. This contract is particularly useful for import & export payments where the transaction takes place up to 3 months after the actual order date.

When should it be used?

You should consider using a forward contract if you have an up and coming payment to make in the future and don’t want to risk it becoming more expensive. If your view on the market is that the price will get worse in the short to medium term, then rather hedge all or part of what you will need to pay and reduce your risk.

Who should use it?

Forward contracts are ideal for any company where there is a time delay between when products are ordered, or services are delivered and when the actual payment takes place. (importers and exporters)

For more information about hedging and forward contracts why not download our Hedging Guide.