Guide to Cash Management by John Tennent

Author:John Tennent
Language: eng
Format: epub
Publisher: PublicAffairs
Published: 2012-08-14T16:00:00+00:00

Forward contract

A forward contract is a contractual agreement that fixes the exchange rate on a sum of money at a future date. There is a fee for this service and loss of any potential foreign-exchange gain, but there is no downside loss. The forward contract would be purchased at the point of sale to fix the rate at which the proceeds will be converted back to the base currency.

Currency future

A currency future is an agreement between two parties – a buyer and a seller – to buy or sell a particular currency at a future date at a particular exchange rate that is fixed. Although this is the same as a forward contract, it is structured as a tradable contract that can be bought or sold on a futures exchange. Therefore if the exchange rates are moving advantageously the currency future can be sold, leaving the business unhedged but able to take advantage of any further favourable movements.

One problem with forward contracts and currency futures is that there is no potential for taking the gain in favourable exchange-rate movements. This is the benefit of options.

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