Forward Contracts: Definition and Frequently Asked Questions

Forward contracts offer protection against fluctuating exchange rates when you need to send an international money transfer.

When you need to send money overseas, the exchange rate you receive is a crucial factor in determining the overall cost-effectiveness of your international money transfer. The value of the Australian Dollar relative to other currencies around the world changes all the time and is influenced by a range of factors. This, in turn has an impact on how much of the money you send arrives to your beneficiary.

You can protect yourself against fluctuating exchange rates by placing a forward contract, which allows you to secure the current exchange rate for use in a future international money transfer.

Rates last updated December 18th, 2017
Details Features
IG Forex Trading Account
IG Forex Trading Account
Trade from over 10,000 markets with Australia's leading service for CFD trading and forex. Spreads: From 0.6 pips Go to site More info
Saxo Capital Markets Forex Trading
Saxo Capital Markets Forex Trading
Trade more than 180 currency crosses across multiple devices with a forex trading account from Saxo Capital Markets. Spreads: From 0.2 pips Go to site More info
Pepperstone Forex Trading Account
Pepperstone Forex Trading Account
Limited offer: Earn Qantas Frequent Flyer points on every dollar in your trading account, plus on every eligible lot traded by December 31st. New account holders only.
Access more than 70 tradable instruments and flexible leverage of up to 500:1.
Spreads: From 0.0 pips Go to site More info
FP Markets FX Trading Account
FP Markets FX Trading Account
Trade forex using an Electronic Communications Network (ECN) model, meaning FP Markets doesn't profit from client losses. Two account types to choose from. Spreads: From 0.8 pips Go to site More info
IronFX Forex
IronFX Forex
Trade Forex, CFDs, spot indices, spot commodities and more online. Spreads: From 0.0 pips Go to site More info
Plus500 CFD Forex Trading Service
Plus500 CFD Forex Trading Service
$30 welcome bonus available. T&C's apply.
Trade Australian and international CFDs on shares, forex, indices, commodities and more.
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InstaForex
InstaForex
InstaForex offers access to 107 currency pairs and CFDs on futures as well as access to global indices and a range of commodities. Spreads: From 0.0 pips Go to site More info
Vantage FX
Vantage FX
Low commission fee on trades with $0 account keeping fee. Spreads: From 0.0 pips Go to site More info
Halifax Online Forex Trading
Halifax Online Forex Trading
Trade US and Australian shares, options, futures and CFDs with no registration fees. Trade 24/7 on your desktop, tablet or smartphone. Spreads: From 0.0 pips Go to site More info
Rates last updated December 17th, 2017
Name Product Min. Transfer Amount Transfer Speed Services Online Transfer Fee Rate Amount Received Description
Exclusive: OFX (Ozforex) International Money Transfers
AUD 250
1 day
Online, Phone, Agent
Limit orders applicable for amounts greater than AUD$30,000.
The ‘Rate’ and ‘Amount Received’ displayed are indicative rates that have been supplied by each brand or gathered by Finder.

Exchange rates are volatile and change often. As a result, the exchange rate listed on Finder may vary to the actual exchange rate quoted for the brand. Please confirm the actual exchange rate and mention “Finder” before you commit to a brand.

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Rates last updated December 17th, 2017
Name Product Monthly Fee Standard Brokerage Fee Margin trading - Online IPOs / Floats International Description
IG Share Trading
$0
$8
Yes
Yes
Yes
Low brokerage fees on Australian and international shares.
Saxo Capital Markets Share Trading
$0
$9.90
Yes
No
Yes
Access over 19,000 Australian and global shares.
HalifaxOnline
$0
$14.95
Yes
Yes
Yes
Trade US and Australian shares, options, futures and CFDs with no registration fees. Trade 24/7 on your desktop, tablet or smartphone.
FP Markets Share Trading Account
$0
$14.95
No
No
Yes
Trade in ASX Stocks and CFDs, International CFDs, CFD Futures, Forex, Indices and Commodities.

Compare up to 4 providers

What are forward contracts?

Forward contracts are an international money transfer tool that allow you to reduce your exchange rate risk. When you place a forward contract you can lock in the current exchange rate for an overseas money transfer that will take place at a later date.

Securing a rate in advance allows you to plan ahead and safeguard your finances against any potential future drops in the value of the Australian Dollar. If you expect the value of the currency you are planning on sending to fall, you can consider placing a forward contract and ensure that you get better value for money on your transfer.

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How do forward contracts work?

Forward contracts let you enjoy the benefits of a good exchange rate today on a transaction that will take place up to 12 months into the future. To calculate the rate for your forward contract, a money transfer provider will adjust the spot rate (the current market exchange rate) for what are known as ‘forward points’, which factor in the difference in interest rates between your sending and receiving countries and the length of time until your transfer will actually be completed. A standard formula is used across the industry when calculating forward point.

You will usually be required to pay a deposit to secure your exchange rate but will then be able to enjoy protection against any exchange rate fluctuations that may occur until your transfer is placed.

brian-case-study

For example, Brian knows that he will need to send a transfer of AUD $5,000 to the United States in two months’ time to pay off an outstanding debt to his brother. The current exchange rate is 1 AUD = 0.70 USD, but financial experts and economists are predicting the value of the Aussie Dollar to drop further in the coming weeks.

Brian doesn’t have all the funds needed to transfer the full amount now, so he places a forward contract with an online money transfer provider and locks in the current exchange rate. He pays a 10% deposit of $500 and, two months later, pays the remaining $4,500 and his transfer is sent. Brian’s brother receives USD $3,500 two days later.

Had Brian not placed a forward contract and simply transferred the money using the best exchange rate he could find, he would have had to settle for an exchange rate of 1 AUD = 0.67 USD. This means his brother would only have received $3,350 - $150 less than he received thanks to Brian’s forward thinking.

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What types of forward contracts are there?

Although this article only deals with forward contracts in terms of international money transfers, forward contracts can also be used as a trading tool across a range of other financial assets. These include shares, contracts for difference, commodities and more.


How do I compare forward contracts?

  • Exchange rates. Although forward points are calculated using an industry standard formula, the spot exchange rate on offer will differ from one company to the next. See which transfer companies regularly offer exchange rates that compare favourably to the competition.
  • Fees. Will you need to pay an extra fee to lock in a forward contract? If so, how much? And will you need to pay this on top of the standard transfer fee that a company already charges?
  • Transfer options. Consider the options available for placing a forward contract, such as online, over the phone, or by using a mobile app.
  • Customer support. If you ever have a question about a transaction, will you be able to get the help you need from your transfer provider?
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What are the pros and cons of forward contracts?

Pros

  • Protect yourself. Forward contracts allow you to protect your finances against the impact of fluctuating exchange rates.
  • Buy now, pay later. You don’t have to pay for the full cost of your transfer until it is actually placed, which could be up to 12 months into the future.
  • Choose a rate that suits you. Forward contracts give you the power and freedom to secure an exchange rate that suits your financial needs.

Cons

  • The exchange rate could improve. Predicting the future value of a currency can be difficult, so there is a risk that the exchange rate will rise in the interim and cost you money.
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What are some of the risks?

The main issue to be wary of with forward contracts is that the exchange rate could rise after you lock in a forward contract and you could end up losing out. A huge range of factors can affect the value of one currency relative to another, and sometimes it’s not possible to predict exactly which way the value of a currency will go.

Frequently asked questions

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