Forward Contracts Explained

Please bare with me on this as I am about to make it very simple… I hope.
If I get carried away or if you just don’t get it please let me know.

Firstly, A forward contract is a method of ‘locking’ a rate of exchange, this means that if todays rate is very good you could enter into an agreement to purchase x-amount of the currency at that rate, but not have to use it until you need to up to a maximum of 18 months. Generally the client pays a deposit of 10% at purchase and then the remainder when the currency is needed.

One thing I should make clear is that a Forward Contract is NOT a forecast on the fluctuation of the exchange rate but is actually a forecast on the fluctuation of the interest rate of the country of the respective currency.

A forward contract is perfect in the following situation…

I buy a house in Spain for ?100,000 (yeah right)
But I dont need to pay in full for 1 year as it is ‘off-plan’

I look at the rate which is favorable for me as it is at an all time high.
I book a forward contract for ?100,000 costing me the relevant amount in ?GBP

When the time comes to pay in full (my house is built and ready) the rate has dropped and if I bought the currency now
I wouldn’t get as much, but, I bought before so I gain. I then ‘draw down’ on the forward contract (take the remainder)
And move in to my new home.

This would not be good of the rate went the other way. Luckily there are FX companies to advise on this.

*** Message to anyone buying currency ***
Do not be pressured into purchasing any type of currency payment.
I will offer anyone *registered* on this forum my services on an advisory basis for free.
Just so you don’t get a bad deal, once again I’m not saying use my company but I will answer any question and get anyone a rate.
Don’t just buy, compare.

I really must stress the fact that I will honestly help you and point you in the right (from my perspective!) direction.

I hope you all find this informative and if there are any other aspects or even this particular aspect you want me to expand on please just ask.

Kind regards,

RivieraDelSol.

Hi again Riviera,

This is another helpful post.

Are there any financial instruments offered that allow one to protect against the risk of a currency fluctuating against you (in this situation for example)?

To everyone else:
I think we would all appreciate it if you ask any questions for Riviera out here in the open (without any identifying information of course!) so that we can all benefit from the information provided!

There are a number of useful tools Expatriator, however I have merely brushed upon a very simple and widely used one.

I would suggest that if anyone has a specific situation they should post here and I would be happy to help.

I don’t mind if users remain anonymous etc but please provide as much info as you can.

To directly answer your question, I would say that the only way to protect yourself would be to constantly compare. I could talk all day about our company but the bottom line is that people will do what they feel is best for them, I merely aim to aid that.

I look forward to seeing everyones questions / experiences!

RivieraDelSol.

By “tools” I meant financial tools like options trading or currency fluctuation insurance.

Ah, my apologies.

These tools are very common today.

However, they are generally used by speculative buyers/sellers (those who trade daily - with a margin to lose / gain) Or corporate clients.
I would not recommend using these for occasional users, however, for the hardened FX trader it os worth a look at.

With these particular tools we are now bordering an area where one would have to be aclimatized to the FX business.