Spot contract vs Forward contract

Spot contract vs Forward contract

If you’re looking to transfer money overseas and would like to time it best, you have two options:

> a spot contract, which means you fix the exchange rate for immediate delivery of the funds, usually within two days. This contract is typically used for immediate requirements, such as an invoice or a holiday payment.

> a forward contract allows you to fix the current exchange rate for up to a year but you don’t need to transfer the full amount when booking your trade, you just need to provide a small deposit. A forward contract is the perfect tool to protect yourself against any unexpected rate fluctuations that would impact the price of your transactions. It usually applies to larger sums of money as even a small market fluctuation can significantly impact your budget and therefore make your transaction (e.g. your property purchase) a lot more expensive.

In the last quarter, the currency market has been very volatile, mainly due to Brexit negotiations but also because of the increasing trade war fears between the world’s major economies, China and the USA. If you were buying euros and selling British pounds during this period, the best rate you would have achieved was 1.1558 while the worst rate was 1.1225. As an illustration, on an EUR200,000 property purchase, it would mean a difference of GBP5,133.40. Even if you didn’t have all the funds available or were not completing on your property when the rate was most favourable, you would have been able to secure the best rate by using a forward contract.

Although Brexit has been a major contributor to the exchange rate fluctuations, many other factors influence the markets. For example, political events, economic data or even the weather can have a significant impact. This is where a currency broker with insight knowledge and market expertise can make a difference by not only offering you competitive exchange rates but also providing guidance on the currency market.