FX Spot & Forward Contracts

Spot FX Contract

This is a basic foreign exchange contract, a binding agreement between parties to sell one currency and buy another in a specified amount, at a specified rate, for immediate delivery (within 2 days). Traditionally settled Spot, T+2 these can be flexible within that time frame and also settle for same or next day value, providing the relevant payment cut off times are met.

Pros:

  • Regulated market and high liquidity
  • Suitable for immediate delivery

Cons:

  • Does not protect against future currency movements
  • Not a protective hedge, as uncertain outcome – you do not know what rate of exchange you will be dealing at in the future

Forward FX Contract

This is a binding agreement between parties to sell one currency and buy another in a specified amount at a specified rate on a specified date in the future (from 3 days to 2 years with Clear Treasury).  This future settlement date can be on a fixed date (closed forward) or within a range of dates in the future (open forward)

Pros:

  • Secure FX rate for Future payments
  • Lock In FX risks, secure profits
  • Flexible dates allow client to choose when to settle

Cons:

  • Opportunity Cost: should the rate move in your favour in that time the opportunity of the move is lost as you have a fixed agreement contract
  • Can require a margin payment or credit facility
  • Rate can be different to the spot rate

Non Deliverable Forward (NDF)

This is a hedge product, similar to an FX forward contract, however it is used to hedge exposures to certain currencies where there are restrictions on the physical delivery of the currency. (eg CNY, INR, MRY etc). Like an FX forward contract this is an agreement to sell one currency and buy another, in a specified amount at a specified rate on a specified date in the future. Unlike an FX Forward contract, there is no physical settlement, instead the deal is settled against a fixing rate at maturity with the difference either being paid or received in order to match the original agreed rate.

Pros:

  • Allows to hedge forward risk in restricted currencies

Cons:

  • There is no physical delivery of restricted currency at maturity

Market Orders – Take Profit Limit Order

This is an order that is placed in the market that will result in a foreign exchange spot contract to sell one currency and buy another, in a specified amount, at a specified rate, providing the designated rate trades in the market should an exchange rate trend favorable in your direction. Allowing you to achieve an order better that the current spot on offer. The Limit Order will remain live in the market 24 hours a day until a date/time specified by you.

Pros:

  • Can target a rate in the market to transact
  • Order Remains live even when the office is closed. as long as FX markets are trading the order is live(10.00pm GMT Sunday Evening to 10.00PM Friday Night)

Cons:

  • Market may not trade to the order level and you may have to book a spot contract

Market Orders – Stop Loss Order

Similar to a Take Profit order, this is an order that is placed on the market that will result in a foreign exchange spot contract to sell one currency and buy another, in a specified amount, at a specified rate, providing the designated rate trades in the market. In the case of a stop loss order, however, the order is to limit any potential losses you may incur should the currency rate trend adversely against you.

Pros:

  • Can limit potential losses should a rate move against you

Cons:

  • By definition the rate would be worse than the spot rate when placed
  • At times of extreme volatility you may get a rate worse rate than your market order

Market Orders – OCO

Or One Cancels Other, this is a combination of a Take Profit order and a Stop Loss order. Whichever designated rate trades in the market first will fill, automatically cancelling the other order. This allows you to set a range on a currency exchange rate, which satisfies your risk appetite.

Pros:

  • Have a best and worst case with in a range

Cons:

  • The stop loss or limit order may never hit.

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