Here are the definitions of some terms that you will see when looking at currency exchange, spot contracts, fixed term forward contracts and forward time options contracts are some of the common ones used. When you speak to an account manager they will explain in more detail which one is best to use or even a combination of contracts based on your circumstances and currency exchange needs.
A contract when you need a currency immediately. Spot Contracts enables you to purchase your currency at today’s rate. The currency is made available for delivery immediately on receipt of your cleared funds. Currency can then either be transferred telegraphically to your designated account, or held on account pending your instructions.
Fixed Term Forward Contract
Used when you have a future commitment to pay funds on a fixed date in the future where you can fix the rate for up to 2 years ahead. An example for a Fixed Term Forward contracts is when you need to stage payments on the purchase of a house under construction. The rate is fixed and locked in at the time of the agreement, and remains constant irrespective of fluctuating exchange rates.
It ensures that your financial commitment is fixed and constant in pounds sterling. It’s a form of insurance often used by large companies to ensure that their commitments or monies owed to them in foreign currency are fixed in value in pounds sterling.
Forward Time Option Contract
Is used when the date of future payments may change. An example of a Forward Time Option Contract is if property is under construction and the last payment is due only when the builders have completed the work. As the precise date is not known but an estimated completion date can be within a three-month window. A Forward Time Option contract gives you the flexibility to collect your currency at any time between two predetermined dates, up to 90 days apart.
Cap Your Costs
An added advantage of a forward contract is that you only need to make a deposit between 5% and 10% of the contract value. This allows you to cap the cost of your future commitment, while retaining your capital until the payments are due.
In addition to currency options used here is also more information on some of the additional currency terms you need to know.
Sell rate – this is the rate that they sell foreign currency in exchange for local currency. If you were buying property in France and need to pay in the local currency and you live in the UK . Then you would exchange your pound sterling for the euro at the sell rate.
Buy rate – Is the rate that they would buy currency back from when you have arrived home from your holiday and need to exchange it back into your local currency. For example if you went on holiday to the Spain we would exchange your euros back into pounds at the buy rate.
Spread – this displays the difference between the sell and buy rate offered by currency exchange providers.
Commission – is a common fee that currency providers charge for their service which is changing one currency to another. This may be charged as a percentage of the amount or a flat fee. No foreign exchange company charges commission.
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