Risk management tools like forward exchange contracts and limit orders are useful when you have a significant currency transfer planned and want to avoid the volatility of the spot market

Risk management tools like forward exchange contracts and limit orders are useful when you have a significant currency transfer planned and want to avoid the volatility of the spot market

Sending money internationally can be unpredictable as the markets often become volatile in response to ongoing global events. This means that transferring at the current rate of exchange can make it difficult to protect the bottom-line of your business, or personal funds from the sale of an asset.

This feels particularly relevant at the moment with Britain still trying to work out how it will do Brexit. There’s volatility expected for the British Pound during this time, so it’s best to take advantage of any movements that fall in your favour.

Risk management tools like Forward Exchange Contracts (buy now, pay later), and Limit Orders (set it and forget), can help remove the uncertainties associated with adverse exchange rate movements. The benefits of a forward contract option can be great for protecting against volatility if the market is looking good at the moment, however it does prevent you from taking advantage of further beneficial market movements.

Scenario: I’m a Personal customer and I’ve just sold my property overseas. I would like to transfer it into my home account, but the settlement is expected to take another 12 weeks

You’ve gone through the process of selling your home and now you’re just waiting for the settlement. If you like how the exchange rate of your preferred currency pair is looking like at the moment, but you can’t transfer right away, a Forward Exchange Contract could be the best option for you. 

A Forward Exchange Contract allows you to lock in an ideal rate and then transfer that amount at a later date (up to 12 months). Better still, the rate you’d get when you book the Forward Exchange Rate could be better than the spot rate you’d receive at the time you actually need to transfer. How does that work? Take example from and transfer of AUD/USD, higher interest rates in the US means that the spot rate would increase over time.

Scenario: I’m a Business customer and I want to ensure cash flows are predictable so I can reliably price my goods for the customer

The ability to lock in an ideal rate for future payables (like paying overseas staff and suppliers) with a Forward Exchange Contract means that, for international businesses in particular, you can protect against market uncertainty as a result of future global events. This way, you can maintain competitive prices on your products for the customer. 

Take for example, in early January 2019, the NZD fell to 0.66 USD cents. By monitoring the rates prior to making your transfer, you can use these market changes to your advantage by locking in that rate and using it to transfer funds for payables at a later date. This can protect you against market changes as a result of US events (and the predicted volatility to follow) throughout 2019.

Scenario: I’m a Personal or Business customer and have the funds to make an international money transfer, but I’m in no rush to transfer immediately. How can I get the best rate?

If you’re someone who likes to keep track of market rates and you suspect a turn of the market in your favour, you could use a Limit Order option. Limit Orders allow you to lock in a target rate 24/7. You tell your fx dealer what rate you want, and then their currency experts will monitor the market for you. If it hits, they can either notify you with a phone call, or they can transfer the funds immediately. 

The benefit of using a Limit Order means you also have the option to roll it into a Forward Exchange Contract. For example, your circumstances might have changed and you don’t have the funds to make the transfer immediately once your target rate is reached, but will at a later date. You can use the target rate that you’ve set (and now reached) and turn it into a Forward Exchange Contract. Then you can transfer the funds once they become available at any point for up to 12 months.

Despite the volatility that can come with foreign exchange, with the expertise that companies like OFX can offer, there are ways to create more certainty in uncertain markets. You can chat to the experts at these fx dealers about Forward Exchange Contracts or Limit Orders and find out what solution would work best for you. 

Dealers like OFX or XE can also offer tools to help you monitor the exchange rate before signing up. Their Currency Converter lets you compare different pairs and what the market rate would be at that given point in time. If you have a certain rate you’re interested in but don’t want to commit to the transfer yet, you can sign up to Rate Alerts where they’ll monitor the rates for you. Once your target is reached, they will notify you via email or SMS to take the next step.

This article was adapted from content supplied by OFX. You can contact them here.

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