When you send money overseas, the exchange rate you get has a big impact on the cost of the transaction. But the foreign exchange market can be volatile, with rates fluctuating every day.
So if there's a good exchange rate available today, you might want to lock in that rate for future international transfers, protecting yourself against any potential exchange rate drops. That's where a forward contract comes into play.
What is a forward contract and how does it work?
A forward contract is an agreement between two parties to carry out a future trade at a predetermined price. Forward contracts are commonly used in commodities trading, but they're also useful tools for individuals and businesses sending international money transfers.
With a forward currency contract, you can exchange currencies on a future date, but at an exchange rate you lock in today. Here's how it works.
Let's say you know you will need to make an international payment in six months' time. Exchange rates are favorable right now, so you decide to take out a forward contract to lock in today's rate. Then, six months later when your transfer is sent, you know exactly how much it is going to cost you — even if the mid-market exchange rate at that time is very different.
That's why some transfer companies refer to forward contracts as a "buy now, transfer later" option.
Pros and cons of forward contracts
Pros
Save money. A forward exchange contract lets you protect yourself against exchange rate fluctuations and lock in a great exchange rate today. It also gives you the peace of mind of knowing exactly how much your future international transfer will cost.
Cash flow management. Using a forward contract makes it easier for business owners to manage their cash flow and budget for future expenses.
Hedging. A forward contract is a useful hedge against fluctuating exchange rates, allowing businesses that regularly make international payments to manage their currency exchange risk.
Transfers sent on time. Another benefit of forward contracts is that they allow you to schedule your transfer to be sent on a specific date, removing the risk of you forgetting to send money at the right time.
Cons
You could miss out on a better rate. The exchange rate could improve before the date of your transaction, so entering into a forward contract could mean you miss out on a better deal. With this in mind, you may choose to only use a forward contract for a portion of the total amount you need to send.
Your needs may change. If you don't know for certain exactly how much currency you'll need to exchange in your future transaction, you could get caught out. For example, you may enter into a forward contract to send $20,000 overseas, but later find out that you only need to send $15,000.
You may need to pay a deposit. You'll typically need to pay a 10-20% deposit when you enter into a forward contract.
Finder survey: Do Australians think the Australian dollar will get stronger over the next 12 months?
Response
Female
Male
No
63.1%
50.2%
Yes
36.9%
49.8%
Source: Finder survey by Pure Profile of 1004 Australians, December 2023
Example of a forward contract: Buying a property abroad
John's son is moving to the UK in six weeks, and John plans to send $50,000 to his son to help him buy an apartment in his new country. But with the Aussie dollar trading at the highest level it's been against the British pound in the past 12 months, John is worried that it's only a matter of time before the AUD/GBP rate starts to fall.
Rather than just accept whatever rate he will get in six weeks' time, John decides to enter into a forward contract. He contacts a money transfer company to lock in the current exchange rate of 1 AUD = 0.59 GBP.
As you can see in the table below, if the exchange rate moves as John predicts, using a forward currency contract can result in significant savings.
Without a forward contract
With a forward contract
Transfer amount
$50,000
$50,000
Exchange rate
1 AUD = 0.57 GBP
1 AUD = 0.59 GBP
Amount received
£28,500
£29,500
When should I use a forward contract?
There are multiple situations and circumstances when a forward contract could be the right option for you. These include:
If you're worried the exchange rate will move against you. From interest rates and inflation to political developments, there are multiple factors that can influence currency exchange rates. So if you think the rate for the currency pair you're exchanging is going to move against you, a forward contract offers welcome protection.
If you're sending regular international payments. For individuals and businesses that regularly send large amounts overseas, exchange rate volatility can have a big impact on your bottom line. Forward contracts are a very useful tool for reducing your currency exchange risk and ensuring that your cash flow is easy to manage.
If you're making a big purchase. If you need to exchange money to buy an overseas property or make any other major purchase, even a small dip in the exchange rate could make a huge difference to the cost of your transaction. A forward contract is therefore well worth considering.
If you know the exact amount you will need to send. Forward contracts are worth considering when you know how much money you need to exchange, to which currency, and when. If your needs change and you need to cancel some of the contract or send a larger amount, it could cost you money.
Types of forward contract
There are a few different types of forward contract to choose from depending on your transfer needs:
Fixed forward contracts. This is the most common type of forward contract and ensures that the currency exchange will take place on a specific date in the future.
Open/flexible forward contracts. With an open forward contract, you have the option to settle the contract at any time up to or on the specified date.
Window forward contracts. This type of contract allows you to perform a currency exchange transaction within a specific date range, or window.
What companies offer forward currency contracts?
Many international money transfer companies do not offer forward contracts. However, the good news is that there are several foreign exchange providers that do offer these advanced transfer tools. Some of the options you might like to consider include:
TorFX. You can lock in an exchange rate up to two years before sending the transfer, but you'll need to pay a 10% deposit.
OFX. You can lock in an exchange rate for up to 12 months when you take out a forward contract with OFX.
Xe. Xe's money transfer service allows you to lock in your exchange rate so you can "buy now, send later".
WorldFirst. You can lock in the current exchange rate for up to two years with a WorldFirst forward contract.
Banks. While forward contracts are more commonly associated with specialist foreign exchange companies, major banks like NAB and CommBank also offer forward exchange contracts for business customers.
Money transfer providers that offer forward contracts
A forward contract is traded over the counter (OTC) and is an agreement negotiated between two parties. Meanwhile, a futures contract is a standardised contract that can be publicly traded on an exchange.
Yes, you can cancel a forward contract by entering into a transaction to reverse the original contract. This may result in a cost or a gain to you.
The maximum length of time allowed for a forward contract varies depending on the currency exchange service you choose. While some providers offer a maximum contract length of one year, others allow you to lock in an exchange rate for up to two years.
A forward contract allows you to hedge against exchange rate fluctuations. By locking in the current exchange rate for a future transaction, you can protect yourself against the risk of a falling exchange rate. That's why forward contracts are a common hedging strategy businesses can use to manage their currency exchange risk.
Tim Falk is a writer for Finder, writing across a diverse range of topics. Over the course of his 15-year writing career, Tim has reported on everything from travel and personal finance to pets and TV soap operas. When he’s not staring at his computer, you can usually find him exploring the great outdoors.
What are the best options for sending or receiving a large amount of money overseas? Read this $50,000 case study with exchange rates and fees comparison.
Send an international money transfer to someone without a bank account. Get it there instantly and they can pick it up in person, in cash. Get quotes now.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Important information about this website
finder.com.au is one of Australia's leading comparison websites. We are committed to our readers and stands by our editorial principles
We try to take an open and transparent approach and provide a broad-based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.
Some product issuers may provide products or offer services through multiple brands, associated companies or different labeling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.
We make money by featuring products on our site. Compensation received from the providers featured on our site can influence which products we write about as well as where and how products appear on our page, but the order or placement of these products does not influence our assessment or opinions of them, nor is it an endorsement or recommendation for them.
Products marked as 'Top Pick', 'Promoted' or 'Advertisement' are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options.
Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment when you click on those buttons or apply for a product. You can learn more about how we make money.
When products are grouped in a table or list, the order in which they are initially sorted may be influenced by a range of factors including price, fees and discounts; commercial partnerships; product features; and brand popularity. We provide tools so you can sort and filter these lists to highlight features that matter to you.
Please read our website terms of use and privacy policy for more information about our services and our approach to privacy.
