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Foreign Exchange Forward Contracts: Minimizing Risk in International Transactions

Better Understanding Forward Contracts

Whether you are a small company that is expanding internationally or an individual purchasing property overseas, international business transactions provide an opportunity for growth and higher profits. With that opportunity also comes risk, your business will now be entering the foreign exchange market (FX).
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If you or your company plan to participate in a large business transaction in a currency other than your home currency, either as a buyer or a seller, currency fluctuation can be the difference of thousands of dollars. These fluctuations can make budget planning nearly impossible, or worse, can cause unpredicted costs or losses. Fortunately, there are solutions to help your company mitigate currency risk. One option to consider if your company is planning to make an international purchase in the future is a foreign exchange forward contract.

What is a Forward Contract?

A foreign exchange forward contract is a private, binding agreement between two parties, in which the first party agrees to purchase a certain amount of currency from the second party at an agreed upon exchange rate. The purchase will take place in the future, and will value the currency at the previously agreed upon exchange rate, regardless of the current exchange rate. In essence, the currency forward freezes the exchange rate, and that exchange rate is honored on the scheduled date specified by the forward contract. The length of the contract can be anywhere from several days to months, or even years. A currency specialist will offer forward contracts to companies or individuals dealing with business transactions involving multiple currencies.

Who Offers Forwards Contracts?

Oftentimes, consumers think of banks when they think of forward contracts, but many non-bank currency providers offer forward contracts to their customers. Are you curious about their pricing? Sign up for FXCintel’s portal to gain greater insight into the forward contract world.

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