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How forward contracts work
A forward contract lets you fix a price for buying or selling currency on a specific date in the future. The rate is agreed on the day you book the contract, along with the amount and settlement date. This means you know exactly what your international payment will cost in AUD (or exactly what your overseas receivable will be worth) before it comes due.
Forward contracts are particularly valuable for Australian businesses with foreseeable foreign-currency obligations: supplier payments, lease commitments, payroll, project milestones or any regular international outflow. They remove the uncertainty that comes with leaving exposures unhedged.
Types of Forward Contract available:
- Fixed Forwards: Exchange one currency for another on a specific future date. The most straightforward option for known payment dates.
- Open Forwards: Allows you to draw down the currency at any point between the trade date and the maturity date. Useful when you know the amount but not the exact timing.
- Window Forwards: Provides flexibility to draw down between two future dates. Suited to businesses with an idea of payment windows rather than fixed deadlines.
- Non-Deliverable Forwards: Cash-settle the profit or loss at maturity without physically exchanging the underlying currencies. Typically used for currencies with restricted convertibility.
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SmartHedge PRO
SmartHedge PRO is our currency management platform that makes tracking exposures simpler than ever. Developed and tested to address pressing challenges growing companies face, SmartHedge PRO offers automated solutions that allow business to spend less time pouring over spreadsheets and more time making the decisions that matter.
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Frequently Asked Questions
What is a currency forward contract?
A forward contract is an agreement to buy or sell currency at a fixed rate on a future date. It protects your business from exchange rate movements between now and the date your international payment falls due.
How does a forward contract benefit my business?
By fixing your exchange rate in advance, you eliminate the risk of the market moving against you. This allows for accurate budgeting, reliable margin forecasting and predictable cashflow.
Do I have to pay the full amount upfront?
No. Typically a forward contract requires an initial margin (deposit), with the remaining balance due at maturity. Your account manager will explain the margin requirements for your specific contract.
What is the difference between a Fixed Forward and a Window Forward?
A Fixed Forward settles on a specific future date. A Window Forward gives you flexibility to draw down the currency at any point between two chosen dates, making it useful when your exact payment timings are uncertain.
What happens if the exchange rate improves after I book a forward?
A forward contract constitutes a binding obligation. While it protects you from adverse moves, you cannot benefit if the market rate improves beyond your locked-in level. For businesses that want downside protection with upside flexibility, FX options may be a better fit.
