Why is Now the Perfect Timing for a Currency Forward?

With business and politics approaching instability as a result of current affairs, we look for ways to make our future more certain. Currency forwards are a way to do this, and can bring a peace of mind when it comes to international salaries, sales and/or pensions.

What are currency forwards?

Currency Forwards are known as hedging, but you can think of it as being like insurance. Insurance is usually something you pay a small premium for in order to secure against the possibility of a large future pay out, that may or may not happen. Well hedging is like that, only with a Forward, you're protecting against the future price swings of the currency. So, you know that you'll need to purchase a currency in the future, but you just want to lock in the price ahead of time.

How volatile are currencies during COVID?

So, why now? Well, currency Forwards are nothing new, but they are becoming increasingly accessible to the average person - and more relevant. With more and more expats, international travelers, freelancers and sole traders that deal abroad, many of us are constantly transacting between two or more currencies. And dealing with these are easier than ever thanks to the digitalization of Money Transfer Companies. So, even something like a forward contract is now a quick process from our mobile phone.

That's not why you're concerned though. You're concerned because of Coronavirus, and the oddities it has created in our markets. FTSE and DOW prices are going absurdly strong despite the crash a few months ago, with companies rallying despite not having made a sale in three months.

But it’s more than just companies and markets, Coronavirus shifted our focus to governance structures. There’s no doubt that some countries have shown their stability and strength by containing the virus, as well as smoothing over the economic crash with a lot of government funding.

The UK for example has done, at best, an adequate job of keeping infection rates low. However, they have shown the value of having nationalized healthcare, with even the Prime Minister being successfully treated, along with a generous amount of small business grants and paying 80% of the self-employed wages. This might be one example of why the GBP has strengthened a lot against the Russian Ruble since February, because Russia is showing that they’re sufficiently dealing with the pandemic.

Nevertheless, things are changing every day. Government’s declare different strategies each day, businesses are being told they have to close, or re-open, and the markets reflect this. Volatility and uncertainty is high, and having many experts project a second wave isn’t helping.

Why Forward Contracts pricing doesn’t take volatility into account

Because forward contracts are set when the contract is executed, the contract is not subject to price fluctuations. Many hedge fund managers use these to avoid volatility in asset prices, but almost anyone can take advantage of these when dealing with currencies.

You would have thought “if the FX company knows times are turbulent and looking bleak, then I’m going to have to pay a big premium for securing this rate now” - however this is not the case. Forward rates reflect interest rate differentials, the current rate and the time to duration. Thus, forecasting is not a function of the price you’re quoted for a forward. That being said, it is a function in your decision, so you can see why this a very useful risk tool.

If you’re not 100% sure you will want to buy a certain amount of currency at a future date — if this is too much commitment — currency Option Contracts are available, which are the same as forwards but leave you with the option of whether you want to execute the transaction upon its maturity date.

It really is times like these where forwards are very useful. If you consider the number of variables that go into the price of a currency, you soon realize why it’s next-to-impossible to predict price movements. But then chuck in US elections, many international tensions, Brexit and a global, currently-incurable pandemic that poses the potential of a second wave, and you soon realize how exposed you are.

It really is possible that the country you’re living in could be on the worst end of COVID very soon, along with an economic collapse. The pandemic has been a wakeup call for orthodox capitalism, showing us that we’re not invincible. But whether the above happens or not, it’s the uncertainty that’s key here regarding currency. The fact that the above reality gets closer or further away each day is what is creating volatility.

This is why forward contracts fix this, to an extent, by offering certainty.

How to find currency firms offering smaller businesses with access to Forwards?

Thanks to Money Transfer Companies, as mentioned earlier, we are able to better access currency hedging. If we take the example of a GBP USD forward contract, you can simply browse Money Transfer Company reviews sites to see which companies offer hedging, and which offer other features that are useful for businesses.

Some of the key companies you will stumble across are Moneycorp, Torfx and World First. The things you want to consider are how many currencies it deals in (i.e. this ranges from anywhere between roughly 12 and 130), as well as what countries they have offices in and what their customer reviews are like.

Customer support is an important one, because you’re dealing with potentially lots of money. You want to be sure that your money is safe, and that if you can’t access it for whatever reason, you can speak to someone immediately.

Final Word

Currency forwards are one of very few ways to be more certain of the future. Having savings and government support are some other ways, but even those are often outside of our control.