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FX forwards

You can enter a binding agreement to buy or sell a currency amount at a future date.

DNB Markets offers FX forwards to secure exchange rates for future income.
  • Lock in the exchange rate for future income and expenses

  • Reduces foreign exchange risk

  • Creates a secure basis for buy and sell calculations

When are FX forwards used?

If a company buys a product from abroad it can take some time before the invoice falls due for payment. In the meantime, exchange rates may change, making the product more expensive, or cheaper. If the company is buying a large quantity, this can lead to major additional costs if the exchange rate rises. Some companies prefer to hedge against unfavourable changes in exchange rates.

A forward removes FX risk

By using an FX forward, your company can hedge against this unpredictability and eliminate FX risk. When you know what the exchange rate will be, you’re hedging against unpredictability, which again results in a more reliable basis for your purchase and sale calculations, as well as liquidity and profits.

Who needs FX forwards?

All import or export businesses that are exposed to continuous changes in exchange rates will benefit from FX forwards. The rates change all the time and can result in significant losses if the exchange rate goes in the wrong direction. Using FX forwards, the company can hedge against fluctuations in currency on future income and expenses.

How do FX forwards work?

When you enter into a FX forward, an agreed exchange rate (the FX forward price) is set. The FX forward is not settled until the contract maturity date, and therefore does not have any liquidity impact until the settlement date.

What are the possible disadvantages of an FX forward?

One disadvantage of an FX forward is that you will not be able to utilise rate changes in your favour after the trade. Since the rate is locked in, you will not benefit from a future fall in the exchange rate when importing, or an increase in the rate when exporting.

How is an FX forward priced?

The FX forward price is comprised of a spot price and an addition to or deduction from the spot price. The addition or deduction is an expression of the interest rate differential between the currencies involved for the relevant period. The forward price is not an expression of the bank’s expectations of a future change in exchange rates.

What term can be agreed?

Normally, the maturity date is between one week and 12 months in the future. However, DNB Markets can also set prices beyond these time frames.

What is an FX forward?

An FX forward is a binding contract between the bank and the customer to buy or sell a currency amount at a future date at a pre-arranged price.

FX forwards FAQs

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