PureFX

The Advantages of Fixing Your Foreign Exchange Rate

Mon 12th March 2012

Hi there! In this post I’m going to outline some of the advantages of fixing your foreign exchange rate, and how you can go about it.

If you’ve ever changed currencies before, or even just spent time paying attention to the foreign exchange rates, then you’ll know the market is volatile. The rates can change a great deal even in the course of one day, depending on the political and economic information coming out at the time. The aim of fixing your exchange rate then, is to protect you against sudden declines in the exchange rate, securing your target rate before the time you need to change currencies.

For example, in the past week alone, the UK pound has lost one cent against the US dollar. This is for a combination of reasons, including improving job creation figures in the US, as well as concerns about a proposed carbon tax on flights in the EU. Meanwhile UK sterling has lost almost two cents against the Canadian dollar, for exactly the same reasons. If you’re someone that has planned to change sterling into US or Canadian dollars then, and waited just one week, that is a significant decline in the rate. The value of a forward contract is to shield you against such losses as these.

Using a forward contract locks in the exchange rate so that, for example, if you set up a contract to change GBP into USD on the 5th March 2012, you would get 1.5810. From then on until the time you close on the contract, you would therefore be unaffected by declines in the exchange rate, including the recent one to 1.5610 on the 12th March 2012.

Of course, though this is obviously advantageous, using a forward contract can be a double edged sword. It after all means you’re unable to benefit if the exchange rate goes up before you close, since you’ve locked in the rate. It’s therefore best to be sure the rates are especially advantageous before locking in the rate, rather than establishing a forward contract at a 12 month nadir.

Setting up a forward contract meanwhile is quite simple. Just get in touch with a foreign exchange specialist such as ourselves, and explain your circumstances to the dealer you speak with. He or she will be able to establish whether a forward contract is appropriate given your circumstances, or whether there’s another way to maximise your foreign exchange gains. For instance, alternative contracts include spot contracts and limit orders, which both have different advantages to forward contracts. If however you’re decided on a forward contract, you dealer should be able to arrange one for you there and then.

If you have an questions about setting up a forward contract, get in touch with one of our dedicated dealers on +44 (0) 1494 671800 or email enquiries@purefx.co.uk. You can also visit us at foreign exchange specialists Pure FX. We’d be delighted to help with your enquiry.