A forward exchange contract is a contract between a client and FNB International Banking to exchange a specified amount of one currency for another currency, on a specified future date, or between specified future dates at an exchange rate agreed at the time of entering into the contract.
What will happen if the rate is better on the day when I need to pay / or receive foreign proceeds?
Forward exchange contracts are legally binding contracts and therefore performance under the contract must proceed. Forward exchange contracts are hedging instruments and can be compared with an insurance policy where a premium is paid to insure you against an adverse event taking place. If the event does not occur, the premium is not refunded. There is always a trade-off between risk and cost to insure.
Fixes the price of foreign currency payments expected to materialise at a future date
Resulting from the availability of early draw downs, extensions and cancellations
Amounts and delivery dates can be tailored to meet the client's requirements
Protection from unfavourable movements in future spot rates
Eliminates adverse currency movements beyond the agreed forward rate
Future cash flows are certain and predictable
Currency risk is the threat to earnings, cash flow and the value of the company arising from changes and volatility in exchange rates. In trade transactions, exchange rates will vary from the date the order is placed to the date of payment and it is difficult to cost goods or budget export receipts under these conditions.
The importer will face currency risk if the exchange risk is not fixed on the date of ordering the goods. Delivery will usually take place sometime in the future and the client is then subjected to the risks of exchange rate movement until the payment is made. Landed price in domestic currency terms may vary greatly from the costing model, which was done at the time of ordering.
Currency risk can be hedged with a variety of instruments - forward exchange contracts being the most common. Hedging is basically agreeing a rate for a future date with FNB International Banking - like taking out an insurance policy to guarantee the future exchange rate. Taking action by hedging one's currency risk assists by eliminating or reducing exposure to movements in exchange rates.
Exchange risk can be managed in a variety of ways
To qualify for a forward exchange contract you need to provide proof of a fixed and ascertainable foreign exchange commitment for the period of the contract - usually in the form of a pro forma invoice. You also need to have credit lines in place with your FNB account manager.