A Forward Contract is an agreement between the bank and its customer to exchange a specific amount of one currency for another currency, on an agreed future date (Fixed), or between two agreed future dates (Time Option). The rate at which the currencies will be exchanged is agreed at the time the forward contract is booked. The Forward Contract rate is calculated by agreeing a Spot Foreign Exchange rate, and then an adjustment is made to allow for the interest rate differential between the two currencies involved between the trade date and the maturity date you have requested.
Forward contracts are generally used by businesses wishing to mitigate the exchange rate risk associated with trade transactions, but can also be used by individuals who require exchange rate certainty for specific future transactions, such as the purchase or sale of an asset denominated in a currency other than euro.
- Provides exchange rate certainty, and therefore better predictability of cashflows
- Provides protection against subsequent adverse exchange rate movements
- However, doesn’t allow benefit from subsequent favourable exchange rate movements
- Designed to protect margins on the underlying transaction
- Can be tailored to suit specific amounts and dates, and available in all major currencies
- No upfront premium
- Cannot be used for cash (foreign currency note) transactions
- Documentation must be completed and eligibility criteria may apply
Should you decide to terminate a Forward Contract prior to the maturity date (for example, in the event that the underlying transaction will not be completed), you will transact an equal and opposite transaction in order to reverse the agreed exchange. It is unlikely that this will be at the same exchange rate as the forward contract, and therefore a break cost or break gain will result. Break costs can be significant depending on market volatility and therefore you should not enter into a forward contract unless you are committed to the underlying transaction.
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This information is intended as an introduction to this product. We offer a range of products to manage Foreign Exchange risk, including more structured products which can be tailored to address your specific requirements. Please contact us and we will be happy to discuss all of these with you, including the benefits and potential risks associated with each product. You may also wish to consider the following: