Monday 23 May 2011

Introduction to Foreign Currency Forward Contract

What does foreign currency forward contract mean?  Currency forward contract is an agreement between two parties to exchange two currencies at a fixed currency exchange rate at some point in the future but within 24 months.  There are number of foreign exchange (Forex) services provider companies who offer currency forward services to their clients. But the question may arise in your mind that why one would need this service. Every nation has its own currency rate which represents the economy of the country. These currency rates are governed by many economical factors which continuously changes and in result currency rates changes. Trader exchange two currencies and currency exchange rates changes at every second thus it becomes very difficult for him to predict about the changes in value. Even a small change in currency exchange rate can put trader in a big loss. Thus, the demand for currency forward service is increased.

Currency Forward services provides the perfect business solution for all who want to make international payment. As per currency forward agreement, two parties client (can be a trader or any individual making an overseas payment) and the forex company lock one currency exchange rate for the future transaction. Thus, sometimes it is also known as currency future contract. By opting for currency forward service, one needs not to worry about the fluctuations in currency exchange rates. Client is given a specific period within which he can make the payment at any time provided the exchange rate will remain same as decided in the agreement. This way, client is getting currency hedging service.

Currency hedging offered by the forward contracts agreement not always means that you are protecting your transaction from the possible loss but it may also possible that currency exchange rate of the currencies you are trading increases at the time you make the payment and you may loss a good amount of profit. However, it is better to loss some profit than to incur big losses.

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