We’ve had a lot of requests recently from clients asking for more information about FECs and how to use them to reduce their risk on future dated payments. Hopefully the following information will assist you in your own decision making. If you’re concerned about current or future market conditions or would like to chat about the different currency products we have and how they work, feel free to call our dealing room on (0)11 888 0125.

Over the years we’ve spoken to hundreds of clients who’ve had bad experiences with forward contracts. This is largely because they’ve made decisions on the back of poor information.

We’re pro FEC’s! When used in the right way, at the right time and for the right reason – they can be incredibly effective.

Let’s start with a basic explanation of what a Forward Contract is.

A forward contract or FEC, is a contract that allows you to secure the exchange rate today for a payment that will only happen in the future. By securing the rate today, you are removing the risk of your future payments becoming more expensive.

FEC’s are ideal if the market is trading in an upward trend meaning the exchange rate is likely to continue getting worse in the future.

As a South African importer, you need to be mindful of the fact that we are currently trading in an upward trend. This is supported by the daily USDZAR graph. It’s not to say we won’t break the lower support line in the future but as long as this situation remains, you should be taking out some forward cover on your future payments.

* In fact, you should only change your currency buying strategy when we break and close below the lower long-term support line, meaning the trend has changed.

How will you know when to buy and how much cover to take?

This depends on your timescales and view of the market. As we have seen this week, the market will present buying opportunities within the short-term trading cycles, it’s worth capitalising on these opportunities. We’ve seen the market re-trace from R 15 to the US Dollar down to R 14.27 yesterday. On $ 100,000 payment that represents a difference of R 73,000 in just 48 hours.

Our daily traders view of the market goes out every morning, this information is intended to give you an overview of the market and enable you to make better trading decisions.

One of the best ways to reduce the risk on future payments without over committing is to stagger your buying. This way you’ve covered some of the risk but also have the opportunity to buy more should the rates improve. Providing you have an idea of how much you’ll need, you can top these up at any point by buying more.

If you had secured Forward contracts at any point in the last 3 months you would now be holding currency well below current market levels. It’s the benefit of buying early in a rising market. Obviously, we have the benefit of hindsight when saying that but our outlook on the market hasn’t changed so the principle remains the same.

Whatever your currency requirements, our team can work with you to come up with an appropriate strategy. We can also set up rate alerts and notify you when certain trading levels become available. If you would like to discuss this, please don’t hesitate to contact us or check out our website www.fxpaymaster.com

We’ve been involved in Global Money Transfers for over 20 years and in that time, we’ve helped thousands of clients move billions around the world safely and securely.