If you are wondering how to protect your business from currency fluctuations using forwards, then keep reading on.
During the times of global uncertainty and instability, whether it is political, economical or pandemic, the volatility in currency markets can impact international businesses, big or small.
It is important to plan and budget business financial in a way that margins are protected from currency impact.
First of all, what is a forward contract. It is a financial derivative with underlying FX pair, say EUR/USD. Forwards are commonly used to hedge the downside arising from a foreign currency and this way protect business from FX market volatility. Forward allows to fix the exchange rate over a set period of time on a pre-determined volume of currency. Usually banks and payment platforms provide forwards up to 2 years.
There are two types of forwards - open and closed. A closed forward contract allows company to exchange pre-determined amount of currency on a fixed date in the future. So the contract is exercised only at a set date. While open forward contract gives business flexibility to exchange currency at any time within the contract period up to the value date.
Forward contracts give a certainty for business over the exchange rate and helps to mitigate and manage those risks effectively.
In addition, it helps to protect profit margins from potential market downside in respective currencies. The disadvantage is that if the hedged currency price moves upwards, the company is committed to use the forward anyway (closed forward) or at least loses the spread which was paid to the bank (open forward).
How do you get forwards to limit your foreign exchange risks?
The most convenient way is to have forwards from your payments and foreign exchange provider. This will enable your business to have all digital banking needs in one platform.
We recommend to get in touch with us if you would like to get a list of best banking platform that can provide you with multi-currency accounts and ability to place forward contracts.
Here are the key functionalities that you can get access to with our banking partners:
-Single account IBAN for all payments and foreign exchange
-Ability to receive payments in 40 different currencies
-Ability to send payments in 120 currencies to 170 countries
-Ability to make mass-payments by integrating via API or uploading an excel spreadsheet
-Access to effective currency hedges – forwards.
-Exchange of currencies using reasonable and competitive pricing
-Process automation via API integration
-Cost-effective solution for low value international payments
-Payment control and audit trails
-Streamlined beneficiary management and compliance processes
-Relationship manager ready to help with your currency management operations
Epico Finance team is committed to improve your banking experience and provide a better cost structure overall.
Please do not hesitate to contact us for more information or account opening under better terms.
All in all, business can mitigate their currency exchange risk effectively by placing forward contracts with digital banking providers. Forwards generally allow to cap currency exchange rate up to 2 years, which can protect business margins and ease the budgeting process.