Forward Exchange Contracts for Money Transfers
With CanadianForex, almost anyone can hedge their forex rate risk by using a forward currency contract. A forward currency contract is an agreement by two separate parties (e.g. CanadianForex and its clients) to buy or sell a currency at a predetermined exchange rate in the future. Essentially, forward contracts allow anyone to freeze an exchange rate for future use.
Example of How a Forward Contract Works
Let’s say Joe, who lives in Arizona, wants to retire in a year. He desires to buy some real estate in Canada. Joe finds the perfect location in Vancouver and meets with the Canadian seller Sarah. They negotiate the price of the real estate and both agree that Joe will pay $500,000 Canadian Dollars a year from now. The current exchange rate at the time of the deal is US$1.00 = C$1.00. Joe expects to pay $500,000 U.S. Dollars for the property.
First Possibility - Joe Doesn't Use a Forward
A year’s time passes and Joe is ready to pay for his property in Vancouver. Only now the exchange rate has moved unfavorably for Joe, USD $1.00 = CAS $0.95. Joe’s new property will cost him USD $526,315. That is USD $26,315 more than he originally planned on paying.
Second possibility - Joe uses a Forward
A year’s time passes and Joe is ready to pay for his property in Vancouver. The exchange has changed to USD $1.00 = CAD $0.95. Joe isn’t worried though as he bought a forward contract right after he negotiated the price with Sarah. The rate movement is of no consequence and Joe's original expected price of USD $500,000 remains true! Joe - 1, Unfavorable currency movements - 0
USD $526,315 (the future price) - USD $500,000(expected price) = USD $26,315
Joe saves himself more than USD $26k by thinking ahead and protecting himself with a forward currency contract. Accordingly, forwards should be used by people who want to minimize potential losses due to unforeseen currency fluctuations.
How is a Forward Rate Calculated?
The forward price is calculated by adjusting the current market rate (the spot rate) for "forward points", which take into account the difference in interest rates between the two currencies and the time to maturity. The forward points are based on a formula which is standard industry practice.
Minimum Forward Contract Amount?
CanadianForex loosely sets a minimum contract amount of $30,000. Most customers won’t see the full benefit of a forward if they send less than $30,000.
How much does a Forward Contract Cost?
There are no additional costs for a Forward Contract. All that is required is a small holding deposit paid at the time of booking . Depending on the volatility of the market, this holding deposit can range between 5%-15% of your total Forward Contract amount and will count towards your final payment once the Forward Contract matures. ( e.g. USD $500,000 Forward Contract - USD $25,000 Holding Deposit = USD $475,000 paid at Forward Contract maturity).
Maturity Dates of Forward Contracts?
Because forward contracts are set for the future, you’ll need to pick a specific date for settlement. CanadianForex offers forwards with settlement maturity dates of 2 days to 12 months from the present.
When does Money Change Hands?
You do not have to pay the full amount on the forward until the future maturity date. Additionally, your original holding deposit will count towards this final amount. So for example, a USD $500,000 Forward Contract will require a USD $25,000 holding deposit. When the Forward Contract matures, you will be required to pay the remaining USD $475,000.
What Currencies can you use with Forwards?
While it is technically possible to write a forward contract for any currency, the lack of liquidity for exotic currencies means most forex providers don't deal with exotic forwards. Accordingly, CanadianForex is able to offer forwards on the following currencies:
- € - Euros
- DKK - Danish Krone
- SEK -Swedish Krona
- C$ - Canadian Dollar
- ¥ Japanese Yen
- S$ -Singapore Dollar
- £ - British Pound Sterling
- HK$ - Hong Kong Dollar
- R - South African Rand
- Polish Zloty
- NOK - Norwegian Krone
CHF - Swiss Franc
- NZ$ - New Zealand Dollar
If you would like a quote for a forward exchange rate or just want to know more about forward rates please call one of our foreign exchange experts, available 24 hours a day or Register for Free.
U.S. Free Call 1 888 288 7354
Australia Free Call: 1300 300 424
Canada Local Call: 1 800 680 0750
NZ Free Call: 0800 161 868
UK Local Call: 0845 686 1950
International: +61 2 8667 8090