Trading Forward Contracts

Forward contracts - fix the exchange rate to protect it from possible fluctuations

This is what is provided by a forward contract designed to protect companies and individuals against possible risks associated with sharp fluctuations of national currencies. Forward contracts are commonly used by legal entities seeking to protect their business against the risk of non-core losses.

For example, a large industrial enterprise concluded a contract for delivery of equipment in the amount of $1,000,000 with payment due in 9 months. The enterprise is fully satisfied with the terms of the concluded contract under which it must pay 67 million rubles based on the current exchange rate of 67 rubles per dollar. But if the ruble exchange rate falls to 75 rubles per dollar, the amount under the contract will increase by 8 million rubles, which is something that the financial managers of the enterprise absolutely want to avoid. In this case, it would be advisable to conclude a forward contract. With a leverage of up to 1:50 provided by Alfa-Forex, the enterprise needs to contribute not more than 10% of the amount of the forward contract to ensure that in the future it will have favorable contract terms with a fixed dollar exchange rate.

Recently, an increasing number of private investors are using this instrument to hedge against risks associated with large purchases, whether it is real estate abroad or contracts for University education of their children. There are also many people who use forward contracts to generate additional profits on the financial markets, and this approach is justified as a significant advantage of USD/RUB forward contracts compared to USD/RUB currency pair is an absence of swaps. To put it simply, this trading instrument is ideal for long-term trading because there are no commission fees for the rollover of a transaction to the next day, which brings higher savings to the trader.

An example of a USD/RUB Forward Contract transaction


Let us consider a typical situation that can occur at a large industrial enterprise. To ensure its continued operations, an industrial enterprise concluded a contract for delivery of equipment in the amount of $1,000,000 with payment due in 9 months. The enterprise is fully satisfied with the terms of the concluded contract under which it must pay 67 million rubles based on the exchange rate of 67 rubles per dollar. But if the ruble exchange rate falls to 75 rubles per dollar, the amount under the contract will increase by 8 million rubles, which may lead to serious financial problems.

To protect itself from such scenarios, the enterprise decides to conclude a forward contract. As a result, even if in 9 months the dollar exchange rate rises to 75 rubles, the enterprise will pay $1,000,000 under the contract at the rate of 67 rubles per dollar and so will avoid the impact of currency fluctuations on its business operations.


Benefits of forward contracts


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