Currency fluctuations can present a significant risk to your business and make a big difference to the amount you receive when making a money transfer. Thanks to greater online visibility, the level of risk has reduced from previous years, but with a foreign exchange deal underway, there’s still enough of a risk to warrant protecting your business and keeping your profits safe.
A tried and tested way to counteract vulnerability is use of forward foreign currency contracts. As with any forward contract, a buyer will have an obligation to purchase an asset at a set price at a future point in time. And with forward foreign exchange, locks in exchange rates can be made as far as a year in advance, preventing the risk of currency fluctuation.
Why Do Market Fluctuations Occur?
Economic, technical and political factors can cause turbulence not disturbance in the foreign currency exchange markets, resulting in unpredictable exchange rates which can hinder international trade.
This results in currency fluctuations, often occurring multiple times in one day. Such is the size and volatility of the FX markets its almost impossible to determine which way the rate will move.
Several factors can determine the rise and fall of the market which may include:
- the release of fresh economic data
- movements in bank base rates
- central bank announcements
- political news
With such uncertainty and inconsistency to consider, embarking upon foreign currency exchange can expose your profitability to the risk of detrimental rate risk. This is a sure way of reducing this risk fixing the rate at the outset for a future liability.
How to Hedge Against Currency Fluctuations
Hedging tools can ensure the rate of exchange is fixed immediately, so that you can afford to make large transactions even if exchange rates move against you.
The forward exchange contract (FEC) is a protective hedging tool, that caters for a diverse range of commercial and financial transactions, and most trusted FX specialists offer it.
An FEC enables you to buy or sell a set amount of foreign currency at a specified price for settlement at a predetermined future date (closed forward) or within a range of dates in the future (open forward).
How Does FX Forward Purchasing Work?
Forward contracts have a buyer and a seller. Both parties can make use of forward exchange contracts, as it protects both traders and clients from unfavourable exchange rate fluctuations which might occur between the contract date and the payment date.
Its works with the buyer and seller agreeing upon a price, quantity, and date in the future in which to exchange currency. On the delivery date, the buyer pays the seller the agreed upon price and receives the agreed upon quantity of the specified currency amount.
Forward Contracts can prove useful when:
- You require complete peace of mind when shifting a large sum of money across currencies
- You have a firm commitment to buy or sell a specific amount of currency on a date in the future
- You wish to lock in the exchange rate and will not worry if you’ve locked in a rate and the currency moves in your favour
- You wish to help manage currency fluctuation risk
Need Help with FX Forward Purchasing?
The management of foreign exchange is not something that should be overseen by anyone other than a knowledgeable finance individual, such as an FX specialist.
At CentralFX, we have a team of experienced FX specialists at hand to help you with your international payments. We have also designed a number of free tools to assist in the process. Contact us today to find out more.