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Forward Payments & Contracts

Forward contracts allow you to lock in an exchange rate immediately without having to pay for the purchased currency until a future date. The forward exchange rate is calculated by using the current exchange rate and interest rates for the two currencies and the time or length of the contract. The forward exchange rate is a function of the current exchange rate and interest rates of the two currencies involved and is not a forecast of the future direction of the exchange rate.

Forward contracts usually require a deposit. This allows you to utilise the majority of your funds until the end of the forward contract when the funds are exchanged. Forward contracts also reduce your exchange rate risk by locking in a rate now even though the actual transaction won't take place until a later date. In this way, you can be sure of the cost of your purchased currency before you actually need it.

Example

Many of our customers who import goods and have to pay in foreign currency are concerned that adverse exchange rate movements will increase the amount of local currency they will have to pay when they convert to foreign funds.

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This risk can be managed by using a forward contract.

ABC Limited plans to import goods from the United States, with payment of 100,000 US Dollars to be made in 3 months time. If they were to put through a spot transaction at today's exchange rate of 1.8200 they would only have to pay CAD$54,945.05.

If the GBP exchange rate falls 10% between today and when they convert their funds, to 1.6380 then they would have to pay CAD$61,050.06.

ABC Limited decides they do not want to take this risk and decide they would prefer to 'lock in' a rate today that will be used for the transfer in 3 months. They do this by booking a forward contract with CanadianForex at 1.8165 to buy $100,000 for CAD$55,050.92. This contract is binding on both parties. ABC Limited must give CanadianForex a deposit of 5% to ensure the performance of the forward contract. Just before the 3 months passes, ABC Limited remits the CAD$55,050.92 (less the 5% already paid) to CanadianForex and then CanadianForex pays the USD$100,000 to ABC Limited's suppliers account in the United States. CanadianForex charges no fees and there are no hidden costs.

Important note

Once the forward is booked it is binding. This means that in the above example ABC Limited could not benefit from any increase in the value of the Canadian Dollar, if that occurred. It also means that if ABC Limited was unable to complete the transaction by paying CanadianForex the expected Canadian Dollars the contract would be 'closed out', and any loss that occurred would need to be paid to CanadianForex by ABC Limited (normally out of the 5% deposit if sufficient).

To get started email us at dealers@canadianforex.ca detailing your circumstances and we will send you more information.

Please email info@canadianforex.ca for more details.

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