Imagine you are a company with a need to purchase components worth 250,000 euros from a German supplier in 5 months’ time. Based on a GBP/EUR exchange rate of 1.20 EUR, you have determined that supplies will cost you today GBP 208,333, meeting your budget and cash flow constraints. On this basis you commit to purchase the components, and you agree to sell them to a client at a fixed price, generating GBP 10,000 of future profit to your business.

However, GBP might weaken against EUR during that five month period to a rate of 1.15, meaning that your cost would increase to GBP 217,390 . This would negatively impact your budget, cash flow and reduce your profit by GBP 9057 essentially eliminating all the profit margin.

In this case, if you booked a forward contract with Currencies Direct at the time you purchased the components you would have been able to secure the exchange rate of 1.20 , fix the cost to your business and avoid any unexpected impact on your profit margin. Of course, you would lose out if GBP strengthened against the EURO, but exposing your business to currency risks may have a long term effect , whereas if you buy forward you can guarantee an exchange rate based on where you cost the order.

Currencies Direct forward contracts can also provide flexibility enabling you to take delivery of your purchased currency in part or in full at any time between the contract date and maturity date. All companies with foreign currency exposures need a strategy to manage the risk. Call your dedicated dealer now who will tailor-make the contract to suit your business needs.

In a currency forward, the notional amounts of currencies are specified (ex: a contract to buy $100 million Canadian dollars equivalent to, say $114.4 million USD at the current rate—these two amounts are called the notional amount(s)). While the notional amount or reference amount may be a large number, the cost or margin requirement to command or open such a contract is considerably less than that amount, which refers to the leverage created, which is typical in derivative contracts.

Continuing on the example above, suppose now that the initial price of Andy's house is $100,000 and that Bob enters into a forward contract to buy the house one year from today. But since Andy knows that he can immediately sell for $100,000 and place the proceeds in the bank, he wants to be compensated for the delayed sale. Suppose that the risk free rate of return R (the bank rate) for one year is 4%. Then the money in the bank would grow to $104,000, risk free. So Andy would want at least $104,000 one year from now for the contract to be worthwhile for him - the opportunity cost will be covered.