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RoklenFx for businesses
Currency forward: Way of hedging against exchange rate risk!
Enter a currency forward amount
Agree on a forward rate, settlement date and amount to be exchanged
Deposit collateral
Send required collateral (5-10% of the currency forward amount) to our bank account.
Settlement
Transfer remaining funds which will be converted on the settlement date. Currency exchange will be processed at the previously agreed forward rate.
What is a currency forward?
A currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date. A currency forward is essentially a customizable hedging tool that does not involve an upfront margin payment.
Who is the best fit for an exchange rate risk hedging?
Currency forwards are mainly used by our clients (mostly legal entities) who are expecting an incoming payment or know they will have to make an outgoing payment on a specific date in future. By arranging a currency forward with the same value date of the payment, you can offset the exchange rate risk.
How to enter into a currency forward?
You can enter a currency forward by phone through our dealers. The information you must provide them with is the currency pair, amount and settlement date. The next step is to send a 5-10% margin (depending on a currency pair) which will serve to cover eventual losses in case the exchange rate shifts in an unfavorable direction of the trade.
Is there a possibility to modify already entered currency forward?
The currency forward settlement date can be adjusted by entering into another derivative operation - a currecny swap.
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Example of a currency forward – buying EUR
Entering a currency forward (1st of February)
A legal entity knows it will have to pay an invoice for buying goods in the amount of 100 000 EUR in one month from now. Current forward rate with a settlement date in one month is 26.40 EUR/CZK
| Date of agreement | 1st of February |
| Settlement date | 1st of March |
| Forward rate | 26.40 EUR/CZK |
| Amount in EUR | 100 000 EUR |
| Amount in CZK | 2 640 000 CZK |
| Margin provided on 1st of February (5%) | 132 000 CZK or 5 000 EUR |
Settlement of a currency forward (1st of March)
A spot rate on 1st of march is 26.50 EUR/CZK, anyways the legal entity has a fixed rate at which it buys EUR (forward rate) at 26.40 EUR/CZK.
| Settlement date | 1st of March |
| Spot rate on 1st of March | 26.50 EUR/CZK |
| Forward rate | 26.40 EUR/CZK100 000 EUR |
| Trade value in EUR | 100 000 EUR |
| Trade value in CZK | 2 508 000 CZK (Provided margin subtracted from the value of the forward) |
In this case, the client has saved CZK 10,000 compared to the spot rate (just an example, the client can make both an exchange rate gain and loss thanks to the forward). All risks related to this instrument can be found here.