Forward Contracts

Lose risk and find profit with the forward time option

Minimising risk, maximising profit, and having the ability to effectively plan ahead are three things that every business has towards the top of its financial agenda, because once these are under control, there is little left to go wrong. While this may sound like a distant dream for many businesses, those that deal with ever-fluctuating foreign exchange, maybe they are British-based and import from overseas, have overseas clients or are British-based with locations scattered across the world with foreign employees, could find that controlling risk and profit can be made far less complicated by securing a rate on a set amount of funds, and drawing down on any amount going forward. Essentially, the forward time option is a procedure offered by foreign exchange companies that allows businesses to buy a set amount of foreign currency at a fixed rate, and then draw on that money, at the pre-determined rate, at any point going forward up to the maturity date.

Benefits of the time option forward contract

The key advantage for businesses that deal in foreign exchange is that they can protect against often volatile shifts in a currency value. So, if a business is entering a long-term project and wants to ensure that the foreign currency can be bought for the same amount for the entirety of that project, the time option forward contract will be able to add significant value. Toby Fischer, expert in foreign exchange, explains that the risk element is the crucial reason why many of his clients opt for the forward time option. They simply do not want to spend time watching and worrying about currency fluctuations. He says: “Many of our clients have taken the forward time option simply because it helps them to avoid the damaging effect fluctuations can have on profitability. Through buying a set amount of funds, at a set rate, and over a set period of time, our clients are in a very strong position because they know what their foreign exchange liability is going to be for that period of time and can calculate all their foreign invoice payments on that specific rate. We even keep our clients up to date with foreign exchange rates and factors that affect movements so they can make an informed decision as to when is a good time to fix the rate.” And using the option is very straightforward, so businesses that think it might be a viable option for them and something that could successfully remove long-term currency risk, should read through the following step-by-step guide to securing a forward time option.

How does the forward time option work?

For businesses that are keen to reduce the risk often associated with foreign exchange, the forward time option is a well-used remedy. The option breaks down into the following process:
 
• Secure funds - First of all a business must secure the quantity of foreign currency that it wants to buy, and this will involve careful forward planning to ensure that the right amount is reserved. If the business is securing money for a three-month project, all outgoings over the three months should be taken into account and assessed.
   
• Secure near and far dates - Then the business must arrange the period of time over which the funds will be available to draw down on, and this is called the ‘near’ and ‘far’ date. The distance between the near and far date, also known as the time ‘window’, tends to be between one and three months, though it can be up to a maximum of one year, under the forward time option rules. For example, you may want to secure a near date of December 1 2010 and a far date of March 1 2011, with funds available in full or part anytime between these two dates.
   
• Fix the right rate - Businesses need to understand that the rate at which they secure their funds will be the rate at which they will be permitted to buy portions of that money right up until maturity (far date). Wise businesses will secure a forward time option during periods of favourable foreign exchange rates to add as much value as possible to the option.
   
• Pay 10% of overall fund - Once funds and rates are settled, businesses will be required to pay 10% of the full forward time option amount to their foreign exchange dealer within two to three days. This will secure the deal and allow the business to proceed with the rate protected pool of reserved money.
   
• Draw down - Once the 10% payment has been made, businesses can start to draw down on the reserved pool of money via their foreign exchange dealer. The last draw down made on the contract will include a deduction of the original 10% deposit paid.
   
• Settle up - Businesses then have the flexibility to settle the currency contract at any point prior to the pre-determined time window.
  
  For businesses reliant on foreign currency, it is important to consider the forward time option. This option has proven time and time again that it is capable of not only saving money, but also in streamlining the whole internal international payment process within a company’s finance department.
  
   

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