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Foreign Exchange > Type of transaction > Forward Contract
Forward Contract
What is a "foreign currency forward contract"? What is its function and advantage? Why do I need it?
Foreign currency forward contract means the delivery date is more than two business days for such foreign exchange transaction. Both parities are bounded by a contact to specify with certain date or period, currency exchange rate for delivery of such transaction. Exchange rates can be volatile. If you expect to receive or pay foreign currency at a future date, a forward contract can lock in the forward rate. Benefits of forward transactions:
Fulfill your future need for foreign or domestic currency Hedge an exchange rate to preserve the money value Earn capital gains
If you can't settle a deal on the settlement day, you can request for a pre-delivery or an extension by doing a swap with us.A deposit is required for forward transactions
Pricing：
Forward points = Spot rate x（Quote currency Interest rate - Quoted currency Interest rate）x Forward Exchange rate for the period = Spot rate ± forward points
Example：
Exchange rate moves up and down, the longer trading period, the greater the change in exchange rate & its associated risk. Importers and exporters often sign contract for quite a long time (usually up to 30 days ~ 90 days, and even more).
Therefore, there could be a chance for loss due to the fluctuation of exchange rate. Importers and exporters try to avoid such risk by locking the exchange rate at the point of transaction.
Japanese exporter A sell products to US importer worth of US100,000, the cost is J￥95,000,000, and delivery 3 months later. A forward contact with exchange rate US = J￥96 is set. According to this rate, the importer can get J￥96,000,000, deducing the cost, a net profit of J￥1,000,000 could be realized. 3 months later, if the exchange rate drop to US= J￥95.5, importer can get only J￥95,500,000 which imply J￥500,000 less than the original profit. If the exchange rate drop to US= J￥95 or below, then the importer will be in loss. From the example, we can understand the impact of exchange rate onto the profit for the importer and the importance of this forward contact.
Procedure：
| Client pays deposit to KVB Kunlun |
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| KVB Kunlun issues forward contract |
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