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5+ Advantages of Forward Contracts in Foreign Exchange
Forward contracts are the customized contracts with two participating parties - individual and an institution either a bank or foreign exchange firm. The contract involves the selling or purchasing of an asset like any other contract. However, what differentiates it from future contracts is that the asset can be purchased or sold at a specific date, sometime in the future. The individual selling that asset has the leverage to decide whether he/she will be selling it today or sometime in the future and at what price.
This type of contract is most apt for hedging due to its non-standardized nature. Such a contract can be customized for any commodity. Forward contracts are also regarded as an over-the-counter instrument as they don’t trade on centralized exchange.
Now that we have a basic understanding of what forward contracts are and how they operate. It is time we come to the gist of the document i.e. the benefits it has to offer and why should they be considered beneficial when it comes to foreign exchange.
Advantage of Forward Exchange Contracts
- The first and foremost benefit is that you will end up saving more. When you sign up for a forward contract, you won’t t have to pay extra even if the rates go high.
- Second, you can pay at any day later in the future while still enjoying the commodity in the present.
- Thirdly, there are fewer risks of default which means that you won’t lose your due on foreign exchange.
- Next, you can make the most of the current exchange rate (the lower the better) and lock it for a future receipt or purchase.
- You can easily hedge your exposure while reducing your risk
- You can even draw down to avail currency early on
- A forward contract is very easy to set up and operate
- It is even reasonably priced which means it will be easier to maintain.
Now, if you were looking for all of these benefits under one shade, FrontierPay, a currency exchange firm with well-reputed reviews seems like your best bet. Undoubtedly, it is one of the most predominant online funds transfer firms in the UK and Australia. No transfer fee is charged and the company is known to allow customers to make the most of the currency exchange rate fluctuations with forward contracts.
This FrontierPay review is based solely on the fact that it has proven itself as one of the most efficient firms for online money transfers with strengths in forward contract trading.
Forward contracts may seem an easy way to transfer money but there are a few cons to consider too. This article won’t be complete without a mention of them. One of the biggest disadvantages is the currency moving in your favour but you won’t be able to reap the benefits as the price has already been set at the time of the contract. Therefore, if you are worried more about the gains than the loss, forward contracts might not be your thing.