Anyone in business knows how volatile markets can be—especially foreign exchange (FX) markets. That was abundantly clear last year when the onset of the COVID-19 pandemic roiled markets. Volatility rates among major currencies have since dropped, but it’s only a matter of time before geopolitical and economic events bring more surprises.
If your business has secured contracts for payments or receipts in foreign currencies, then you’re potentially exposed to the hazards of FX fluctuations. Namely: profit loss. The good news is FX risk management is made easy by various products GreenShootsFX offers.
Forward contracts are a great place to start. Here’s how they work and can take risk out of doing business abroad.
Lock in Today’s Rate
Consider this hypothetical scenario: Your business has a large payment due to a supplier in Europe at the end of the year. Today’s EUR/USD exchange rate is very favorable—wouldn’t it be great to lock in today’s rate for the payment, but still have the cash free for other uses between now and December 31st?
That’s exactly what forward contracts do. You set the amount of currency required and the settlement date, which can be up to two years in the future. Upon booking the contract, the client will post a small margin into their collateral account, which is applied to the contract on settlement.’
The big benefits of forward contracts—which can involve any two currencies—are the peace of mind that comes from protecting profits from future FX volatility, and the reliable budgeting and planning that come with avoiding the negative impacts of volatility. You can rest easy, and your business can operate more smoothly.
It’s possible, of course, that by the settlement date the exchange rate could be better than today. But it could also be worse — maybe a lot worse.
Why take the risk? With forward contracts, regardless of which way the market moves, you’ll know the exact cost of the currency you’ll need, on the date you set.
A More Flexible Option: Window Forwards
What’s described above is a fixed-date forward contract: payment at the set rate must be made on the specific settlement date. But there are times when a business isn’t sure of the exact date payment will be required. Or perhaps it needs the flexibility to make payments at a specified favorable rate multiple times within a set timeframe, or window.
Window forwards offer this flexibility. They’re similar to fixed-date forward contracts—you lock in an exchange rate and set a final settlement date up to two years in the future. What’s different is that window forwards give you the flexibility to make a foreign currency payment at a set rate, at any point up to the settlement date, and as often as you’d like. Regardless of the particular FX markets your business deals with, or your sector or payment needs, remember: you’re never on your own when it comes to FX risk management. GreenShootsFX market experts will help you craft a customized plan that may include forward contracts, along with other risk management products.
Your business is too valuable to go it alone — or just hope for the best.