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Forward Payments and 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.

This risk can be managed by using a forward contract.
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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 0.8000 they would only have to pay AUD$125,000.

However if the AUD/USD exchange rate falls 10% between today and when they purchase the US Dollars in 3 months time to 0.7200, the Australian Dollar cost would increase to AUD$138,888.89. This adverse exchange rate movement would cost the company an extra AUD$ 13,888.89.

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 OzForex at 0.7950 to buy USD$100,000 for AUD$125,786.16. This contract is binding on both parties. Just before the 3 months passes, ABC Limited remits the AUD$125,786.16 to OzForex and then OzForex pays the USD$100,000 to the US supplier's bank account. OzForex charges no fees and there are no hidden costs.




Please email info@ozforex.com.au for more details or fill in the form below. You will be emailed a PDF guide to transferring money with OzForex. To view the file you will need the free Adobe Reader software which can be downloaded by clicking on the icon below.

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