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Forward exchange contracts - good or bad idea?

Forward exchange contracts - good or bad idea?

Old Nov 22nd 2007, 1:05 pm
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Default Forward exchange contracts - good or bad idea?

The average exchange rate over the last three years is 1.64 (EUR:AUD), currently the rate is hovering around 1.70 and I can secure two months forward at this figure (when I will have the cash).

Has anyone used forward contracts? Any downsides worth mentioning?

Obviously if the rate improves then I would lose out, but I am happy to lock in a good rate now.
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Old Nov 22nd 2007, 3:48 pm
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Default Re: Forward exchange contracts - good or bad idea?

Originally Posted by MartinH View Post
The average exchange rate over the last three years is 1.64 (EUR:AUD), currently the rate is hovering around 1.70 and I can secure two months forward at this figure (when I will have the cash).

Has anyone used forward contracts? Any downsides worth mentioning?

Obviously if the rate improves then I would lose out, but I am happy to lock in a good rate now.
Martin,

The real benefit of a forward contract is peace of mind, i.e. knowing exactly how many Australian Dollars you are getting from the outset. This means that you can start to plan your budget now and are protected against any adverse movements in the market.

As you rightly say, the obvious argument is what happens if the rate improves as you will have lost out. The question you need to ask is how much risk are you willing to take? If the market moved to 1.80 then fantastic, but what if it moved to back to 1.55 where it was 3 weeks ago? 15 cents in 3 weeks is a huge move, and the market is extremely volatile at the moment.

There is no right or wrong answer as it is impossible to predict these moves, but the forward contract is a way to eliminate any further risk or sleepless nights!

I hope this helps and good luck with the move.

Cheers,
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Old Nov 22nd 2007, 4:16 pm
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Default Re: Forward exchange contracts - good or bad idea?

Originally Posted by Windsor2 View Post
Martin,

The real benefit of a forward contract is peace of mind, i.e. knowing exactly how many Australian Dollars you are getting from the outset. This means that you can start to plan your budget now and are protected against any adverse movements in the market.

As you rightly say, the obvious argument is what happens if the rate improves as you will have lost out. The question you need to ask is how much risk are you willing to take? If the market moved to 1.80 then fantastic, but what if it moved to back to 1.55 where it was 3 weeks ago? 15 cents in 3 weeks is a huge move, and the market is extremely volatile at the moment.

There is no right or wrong answer as it is impossible to predict these moves, but the forward contract is a way to eliminate any further risk or sleepless nights!

I hope this helps and good luck with the move.

Cheers,

Richard, HiFX.
Thank you.
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Old Nov 22nd 2007, 6:00 pm
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Default Re: Forward exchange contracts - good or bad idea?

Martin

I have used forward contracts with Ozforex twice and both times my rate of exchange has been significantly better than the spot rate.

Buzzy
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Old Nov 22nd 2007, 7:32 pm
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Default Re: Forward exchange contracts - good or bad idea?

When we were in the process of migrating I bought a forward contract with HIFX and secured a rate of 2.4375 with a 10% deposit. When I needed funds over here I would check the rates and if it was below 2.4375 I would transfer the cash with HIFX. If it was above 2.4375 I would use the bank and get the higher rate. When I was left with only the 10% deposit in the UK I waited until the rate fell below 2.4375, transferred the 10% deposit over through HIFX and sold the contract back to them with no charges to me as they were now making money as the rate was lower.

In a nutshell, use this facility to guarantee a minimum rate but still take advantage of rate increases by transferring through another source. They wont advertise this but you can do it without breaching any of their rules.

Andy
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Old Nov 22nd 2007, 7:39 pm
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Default Re: Forward exchange contracts - good or bad idea?

Originally Posted by andy thomas View Post
When we were in the process of migrating I bought a forward contract with HIFX and secured a rate of 2.4375 with a 10% deposit. When I needed funds over here I would check the rates and if it was below 2.4375 I would transfer the cash with HIFX. If it was above 2.4375 I would use the bank and get the higher rate. When I was left with only the 10% deposit in the UK I waited until the rate fell below 2.4375, transferred the 10% deposit over through HIFX and sold the contract back to them with no charges to me as they were now making money as the rate was lower.

In a nutshell, use this facility to guarantee a minimum rate but still take advantage of rate increases by transferring through another source. They wont advertise this but you can do it without breaching any of their rules.

Andy
Sounds a bit like a perpetual motion invention to me: why should they let you out of a contract?
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Old Nov 22nd 2007, 8:36 pm
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Default Re: Forward exchange contracts - good or bad idea?

Originally Posted by Wol View Post
Sounds a bit like a perpetual motion invention to me: why should they let you out of a contract?
Because they are still making money out of it.

If you buy 100000GBP worth of AUD at 2.50 you get $250,000. Once the rate has dropped to below 2.50 and you sell your $250,000 back to the market at a rate less than 2.50 you get back more than your original 100,000GBP. They keep that profit. If you sell back to the market at a rate above 2.50 you will get back less so you then have to make up the difference so they are not out of pocket. That is why you are allowed out of the contract, because it doesn't cost them anything, they are making money.

It's got nothing to do with perpetual motion, it's all about understanding the rules and using them to the best advantage. Just because you buy into a forward contract doesn't mean you have to stick with it. Some people buy and sell currency everyday instead of working, it's no different.

Andy
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