What is a foreign exchange forward contract?

With a foreign exchange (FX) forward contract, the current exchange rate is hedged to a defined date in the future. The responsible financial manager does not have to buy a foreign currency in advance and, thus, has more leeway in dealing with the upcoming cash flows. A forward contract is a simple but important financial instrument for small and medium-sized enterprises (SMEs). Through the strategic use of a forward transaction, foreign exchange risks can be controlled or even completely eliminated.

How do currency risks arise?

Every small and medium-sized enterprise with international links has to buy or sell foreign currencies at some point. The international expansion of business is an opportunity for many companies. But as always, opportunities bring risks.

Foreign exchange risks (or exchange rate risks) arise due to exchange rate fluctuations and can have a strong negative impact on SME profits or, in the worst case, completely wipe them out. Due to exchange rate changes, outstanding receivables are continuously revalued. FX gains and losses arise in the process.

The risks are particularly evident in times of high uncertainty in the markets and the resulting increase in market volatility. A company that wants to protect itself from potential losses due to exchange rate fluctuations needs a well planned risk strategy and access to the appropriate instruments.

What is an FX forward contract?

With an FX forward transaction, the current exchange rate is hedged to a defined date in the future. The responsible financial manager does not have to buy a foreign currency in advance and, thus, has more leeway in dealing with the upcoming cash flows.

In a forward, the current spot exchange rate is fixed. Since the maturity of the transaction is in the future, the interest rate difference between the two currencies is also credited or debited in the form of forward points.

Dealing with currency risks

A sound risk strategy helps SMEs to identify risks and reduce these risks to a minimum.

AMNIS is here for you and offers its customers the possibility to flexibly adjust forward transactions. If the transaction is adjusted, the interest rate differential is recalculated transparently based on the original transaction. The fixed spot exchange rate remains unchanged.

Specifically, the AMNIS WebApp offers companies the following additional possibilities:

• Changing the due date:
  Changing the due date (value date) for the entire transaction
• Advance withdrawal:
  Withdraw parts of the original transaction earlier
• Extension:
  Withdraw part of the original transaction later

Therefore, it is not necessary to predict accurately already at the beginning the amount and maturity when fx hedging.