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Brett Dvoretz

March 13, 2015

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Use Currency Forward Contracts to Save on Large International Money Transfers

If you are looking to save money and get the most out of your international money transfer, consider using a currency forward contract. Most people who send money abroad place what is called a spot trade. This means the trade is executed immediately at whatever the current exchange rate happens to be, but people who regularly send money overseas know that getting a good exchange rate can equal to be savings and luckily, there’s way to ensure that you do.

The problem with spot trades comes from the fluid nature of currency exchange rates. Because the value of one currency against another is always fluctuating, you never know if you are going to get a good deal when the time comes to transfer your money overseas and into another currency. Currency forward contracts aren’t subject to that same problem.

 

What is a Currency Forward Contract

In simple terms, a currency forward contract is a way of locking in an exchange rate ahead of time; before the trade ever happens. This can be very beneficial if you are a person or business that regularly transfers money overseas or know of a large international money transfer need in advance.

A currency forward contract works by connecting two parties in need of exchanging money. This doesn’t mean you’ll actually be put in contact with the other party; the foreign exchange firm will handle all of that. Both parties involved agree to the exchange rate they are willing to accept at a future date, which could anywhere from a single day to a few years in advance. Once the set date is hit, the transaction is executed at the agreed upon exchange rate regardless of the current market rates

 

Benefits of a Currency Forward Contract

Currency forward contracts are a way to hedge against the value of a currency dropping at a later date. It can be incredibly useful if you are working with a currency that has a tendency towards massive rate fluctuations. You can protect yourself against an unfavorable spot trade rate at a future date. It’s a valuable way of insuring a good exchange rate if you are planning a large international money transfer such as a house, property, or business purchase in the future.

Most companies that regularly do business overseas use currency forward contracts as way of ensuring a predictable cash flow and hedging against sudden currency drops which could have negative consequences.

For example, imagine a US importer is doing business with a Chinese manufacturing firm. They have a contract to purchase a large amount of products from the manufacturing firm in six months time and the currency for that transaction will be the Chinese Yuan. If the American importer thinks the value of the dollar may fall against the Yuan over the next six months, he can execute a currency forward contract which locks in a rate to purchase the Yuan in six months time. This leaves the American importer fully protected if the USD depreciates in value.

It works the same way for you if you’re planning a large overseas money transfer in the future. Lock in your rates using a currency forward contract and be assured you’ll get a good value for your dollar when the time comes.

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