Protect your business with a Forward Contract
Did you know, you lock in the exchange rate now for a future payment using a forward contract?
If your business makes or receives international payments, you should be using forward contracts, especially in South Africa where currency movements are extreme and often unpredictable.
Forward Contracts or FECs are one of the most useful and beneficial foreign exchange products available to SME’s as they allow you to reduce foreign exchange risk
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. Ideal if you are concerned the rate will get worse and you want to protect your budget.
Why would I need a forward contract?
The problem with foreign exchange, is that exchange rates move constantly and change quickly. This volatility creates uncertainty leaving businesses unsure of what to do. The time difference between placing orders and paying for goods can be up to 2 or 3 months. That’s a lot of risk, when you consider how much the exchange rate could change in that time.
What are the benefits of
taking forward cover?
The economic and political instability in South Africa makes the Rand highly susceptible to large currency swings. It’s not uncommon for the Rand price to move as much as 3% in a single day. For this reason alone, small businesses cannot afford not to hedge themselves.
By fixing the exchange rate upfront, SME’s can plan ahead, control product pricing better and protect future profits against exchange rate erosion. Obviously this works both ways as the exchange rate could also move in your favour after the rate has been secured. That’s why its important for business managers to have a clear view of the market and understand their exposure.
How will I know when to do a forward contract?
It’s important to understand that in the medium to long-term, nobody can reliably predict the currency markets. We use a blend of fundamental and technical analysis to form opinions and likely scenarios. We then share these views with our clients. Looking at things from a different perspective allows them to make better trading decisions.