How Does A Forward Exchange Contract Work?

"A forward exchange contract is made up of two components: the spot component, which is effectively the rate of the two currencies on the day you are looking at doing the transaction, and the forward or future component, which is a reflection of the difference in the interest rates, the difference between the interest rate in one country versus another over that specified time period."

Anyone who might be importing products and has foreign currency transactions in their business, should consider setting up a forward exchange arrangement if there is usually discrepancies in the market; most providers will offer this once they understand the foreign exchange requirements of your business.

Setting a foreign exchange rate for the future could make a huge difference to your profitability especially if there is instability in the market. You can learn how foreign currency can work for you and how you might benefit from securing a forward exchange contract.

Fluctuations in the foreign currency market occur for various reasons, but are mostly in tune with traders’ appetite for risk. But the perception of risk changes daily—even hour-by-hour—as political announcements occur, company information press announcements and global events occur.

To avoid the whims of traders, exporters dealing in foreign currency for business transactions are advised to lock in a forward exchange contract.

Put simply, a forward exchange contract is an agreement between you and your provider to exchange a specified amount of one currency for another currency on a particular date, using a set rate calculated at the point of making the contract.