To make sure that you are managing your transactional risk, it is worth considering the financial options which are available to you. This is where a forward contract or market order can be utilised. But what are these financial features and how can they work for you?
A Forward Contract is a feature where you can lock in a certain exchange rate and hold it for a set period of time. For example if the pound sterling was currently strong against the euro, but you had an invoice that was due to be paid in a month's time, you could set up a forward contract. The contract would 'save' the exchange rate until the invoice was due to be paid, which guarantees you a particular exchange rate. A further type of forward contract would be a forward draw down contract, where you could make transfers at intervals throughout the contract period, as opposed to making the transfer in one lump sum. However, it is important to consider that a deposit may be required to set up these contract types, a transaction fee may be applied each time funds are drawn down throughout the contract period and if a contract is broken, then charges may be applied. A further consideration to take into account is that the forward contract will protect you against a fall, but you may lose out if the market continues to rise.
A market order is where you could ask your bank or broker to carry out a transaction when the market reaches a certain level. A 'limit order' is a type of market order, whereby If you are expecting the markets to rise, you could buy currency at a particular rate. This type of market order guarantees you a particular exchange rate. A 'stop-loss' order is another type of feature which can be arranged so that your bank or broker will sell your currency if the exchange rate falls to a certain level. By using a limit order and stop-loss together, you can more effectively manage your currency transactions.
It is worth noting that there are other types of market orders and forward contracts available and each bank or broker may be able to develop their own type of market order or forward contract. It is always best to discuss your own requirements to see which type of contract would be best suited for your individual needs.
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