Forward Contracts (FEC) - What is a forward exchange rate contract?

    • Themes
      • Trade

        Do you want to know how access to trade finance can increase your cross-border imports and exports? Explore our Trade Finance hub for practical tools.

        Treasury

        Are you a treasury or operations manager looking to mitigate the risks and efficiently manage your business’ cash flow? If so, check out our Treasury Management hub.

        Payments

        Whether you want updates from infrastructure support to cross-border transactions or clearing house operations to processing techniques, you can find all on our Payments hub.

        Letters of Credit

        Ready to to increase your imports / exports to guarantee the payment and delivery of goods? Find out more about LCs here.

        Shipping & Logistics

        Whether you’re transporting goods, or learning about supply chains, warehousing, transportation and packaging, we’ve got you covered.

        Incoterms

        Need to know which International Commerce Term is right for your needs? Explore our curated guides from shipping expert Bob Ronai.

        Sustainability

        Prioritising sustainable supply chains? Building inclusive trade? Working towards the UN’s 2030 SDGs? Read the latest on global sustainable standards vs green-washing here.

        Customs

        Heading into international markets? From the correct documentation to standardisation, here’s what you need to know for a streamlined customs clearance process.

        TradeTech

        TradeTech is rapidly evolving to help reduce some of the biggest challenges when it comes to trade. Keep up with these innovations here.

    •  

       

    • News & Insights
      • News

        The latest in Trade, Treasury & Payments - stay up to date on all the changes across the globe.

        Magazines

        The issues feature experts across the industry on the latest developments with specific themed and regional editions.

        Articles

        Insights by the industry, for the industry. These include thought leadership pieces, interview write ups and Q&As.

        Guides

        Working closely with industry experts and trade practitioners we provide inclusive educational guides to improve your technical knowledge and expertise in global trade.

        Research & Data

        We undertake qualitative and quantitative research across various verticals in trade, as well as create reports with industry association partners to provide in-depth analysis.

        Trade Finance Talks

        Subscribe to our market-leading updates on trade, treasury & payments. Join the TFG community of 160k+ monthly readers for unrivalled access in your inbox.

    • Media
      • Podcasts

        Welcome to Trade Finance Talks! On our series we hear from global experts in trade, treasury & payments.

        Shorts

        Enjoy our bite-sized video content for insights on-the-go with our short VoxPop & summary series.

        Webinars

        Experience the true nature of the TFG community through panel discussions on the latest developments - engage with questions.

        Videos

        Join us as we interview leaders in international trade, treasury, payments and more! Watch and learn.

    • Events
      • Partner Conferences

        We partner with industry conferences around the world to ensure that you don’t miss out on any event; in person or online, add to your calendar now.

        Women in Trade, Treasury & Payments

        Get involved in our most important campaign of the year, celebrating the achievements of women in our industry and promoting gender equity and equality.

        Awards

        Our excellence awards in trade, treasury, and payments are like no other. You can't sponsor them, and they're independently judged. They are the most sought-after industry accolades.

        Online Events

        Join our virtual webinars and community events. Catch up on-demand, right here on TFG.

    • Editions
    • Finance Products
      • Trade Finance

        Trade finance is a tool that can be used to unlock capital from a company’s existing stock, receivables, or purchase orders. Explore our hub for more.

        Invoice Finance

        A common form of business finance where funds are advanced against unpaid invoices prior to customer payment

        Supply Chain Finance

        Also known as SCF, this is a cash flow solution which helps businesses free up working capital trapped in global supply chains.

        Bills of Lading

        BoL, BL or B/L, is a legal document that provides multiple functions to make shipping more secure.

        Letters of Credit

        A payment instrument where the issuing bank guarantees payment to the seller on behalf of the buyer, provided the seller meets the specified terms and conditions.

        Stock Finance

        The release of working capital from stock, through lenders purchasing stock from a seller on behalf of the buyer.

        Factoring

        This allows a business to grow and unlock cash that is tied up in future income

        Receivables Finance

        A tool that businesses can use to free up working capital which is tied up in unpaid invoices.

        Purchase Order Finance

        This is commonly used for trading businesses that buy and sell; having suppliers and end buyers

    •  

       

    • Sectors
    • Case Studies
      • Informing today's market

        Financing tomorrow's trade

        Soft Commodities Trader

        Due to increased sales, a soft commodity trader required a receivables purchase facility for one of their large customers - purchased from Africa and sold to the US.

        Metals Trader

        Purchasing commodities from Africa, the US, and Europe and selling to Europe, a metals trader required a receivables finance facility for a book of their receivables/customers.

        Energy Trading Group

        An energy group, selling mainly into Europe, desired a receivables purchase facility to discount names, where they had increased sales and concentration.

        Clothing company

        Rather than waiting 90 days until payment was made, the company wanted to pay suppliers on the day that the title to goods transferred to them, meaning it could expand its range of suppliers and receive supplier discounts.

        Get Trade Finance

        Informing Today’s Market, Financing tomorrow’s Trade.

    • Get Trade Finance
  • About Us
  • Talk To Us

Forward Contracts (FEC) – What is a forward exchange rate contract?

Last updated on 21 Aug 2024
29 Jul 2016 . 2 min read

Deepesh Patel
Deepesh Patel is Editorial Director at Trade Finance Global (TFG) and host of Trade Finance Talks. Deepesh regularly chairs and speaks at international industry events held by the IFC, EBRD, IMN, WTO, Financial Times and Economist Impact, as well as industry associations including ICC, FCI, ITFA, ICISA and BAFT.

Access trade, receivables and supply chain finance

We assist companies to access trade and receivables finance through our relationships with 270+ banks, funds and alternative finance houses.

Get started

Contents

    Forward contracts are ‘buy now, pay later’ products, which enable you to essentially ‘fix’ an exchange rate at a set date in the future (often 12 – 24 months ahead).

    Forward contracts involve two parties; one party agrees to ‘buy’ currency at the agreed future date (known as taking the long position), and the other party agrees to ‘sell’ currency at the same time (takes the short position).

    A forward contract is between a partner of Trade Finance Global and your company. A forward contract is also known as a forward foreign exchange contract (FEC).

    At Trade Finance Global, our team can not only assess and advise your business on currency solutions, but also suggest the most appropriate financing mechanism, working with expert currency experts and financiers to help bridge the gap in your supply chain, and help you exchange money in different currencies.

    Pricing – How Forward Contracts are calculated

    • The system will adjust the market spot rate for what’s known as a ‘forward point’ when calculating the forward rate.
    • The difference between interest rates between the currency pair and time to maturity is then calculated when forming the FEC.
    • There is a standard formula for calculating forward points which is recognised across the industry. Our experts in currency at Trade Finance Global adhere to this.
    • After the currencies are paired, the total amount the business wishes to trade, and the agreed exchange rate has been agreed, a binding contract is automatically agreed.

    How could a forward contract work? Forward Contract Example

    Example of How a Forward Contract Works

    ABC Factory in Edinburgh is looking to buy motorbikes from Taiwan. The business meets with the supplier, and agrees to pay USD $500,000 in 3 months from now.

    The current GBP / USD exchange rate at the time of the deal is GBP £1.00 = USD $1.32. ABC Factory therefore expects to pay GBP £378,788 for the equipment.

    In 3 months’ time, GBP £1.00 = USD $1.25.

    Here is what could happen;

    Scenario 1: If ABC Factory doesn’t use a Forward contract

    In 3 months’ time, when the business is ready to pay for the goods from Taiwan, the exchange rate has moved adversely for ABC Factory, GBP £1.00 = USD $1.25. This means that the goods would cost £400,000.

    ABC Factory would pay £21,212 more than anticipated originally.

    Scenario 2: ABC Factory does use a Forward contract

    After 3 months, ABC Factory is ready to purchase the equipment from Taiwan. The exchange rate has moved adversely, however, as GBP £1.00 = USD $1.25, ABC Factory negotiated a forward contract with a currency provider.

    The result is that ABC Factory saves £21,212 by thinking ahead and protecting itself with a forward currency contract.

    Pros

    • Allows the business to lock in an exchange rate for a trade that will occur at a future pre-agreed rate.
    • Choose a rate which suits the business that will allow you to buy and sell in the future at a known rate.
    • Manage and budget cash flow without worrying about FX volatility. Forward exchange contracts can be used as hedging mechanisms for a business

    Cons

    • High Risk. If the rate moves unfavourably in the future, a forward contract could be loss making. There is a contractual obligation to fulfil a forward exchange rate contract.
    • A deposit is often required on the commencement of the transaction.
    • The forward rate that is quoted is often given as a premium to the spot rate. The availability of a forward contract is also based on demand.

    Case Study

     

    Equipment Distributor

    The Warwickshire based company supplies equipment to many manufacturers and merchants around the country, and were required to purchase equipment from their suppliers in advance. The forward options provided helped the company lock in a specific exchange rate which helped with future cash flow planning and mitigating currency risk.

    Speak to our trade finance team



    Our trade finance partners

    • Business Currency and FX Resources
    • All Topics
    • Podcasts
    • Videos
    • Resources
    • Conferences
    Latest
    A-Z Latest
    Back to Top