Forward contracts
Feb 26th 2016, 2:30 am
#16
Forum Regular
Joined: Aug 2007
Posts: 172
Re: Forward contracts
I'm in a similar situation. Still have 50% of my funds in sterling, but I can sit on the fence for as long as it takes for the rate to improve. Does anyone know please of a bank in Ontario that has sterling accounts? I'm holding sterling funds with my FX company and don't want to leave it there indefinitely..... I've booked an acceptable rate for my sterling to be exchanged into CAD, and the FX co will advise me immediately when that rate hits, then I transfer immediately my sterling back to them and the exchange is done.
Feb 26th 2016, 3:31 pm
#17
Binned by Muderators
Joined: Jul 2007
Location: White Rock BC
Posts: 11,682
Re: Forward contracts
I seem to be going crazy, so I checked on Investopdia. My bolding:
Futures are financial contracts obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.
Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.
Why is this not what the OP was describing?
Futures are financial contracts obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.
Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.
Why is this not what the OP was describing?
Feb 26th 2016, 3:40 pm
#18
Joined: Dec 2001
Location: Dixie, ex UK
Posts: 52,439
Re: Forward contracts
I seem to be going crazy, so I checked on Investopdia. My bolding:
Futures are financial contracts obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.
Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.
Why is this not what the OP was describing?
Futures are financial contracts obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.
Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.
Why is this not what the OP was describing?
There is no theoretical reason why a speculator can't use futures or forwards to speculate. I would argue that options are a better choice if you want to speculate.
Mar 1st 2016, 7:14 pm
#19
Forum Regular
Thread Starter
Joined: Sep 2014
Location: East Midlands UK
Posts: 74
Re: Forward contracts
Hi folks, thanks for everyone's input. Pulaski was quite correct in terms of how it works. For anyone confused, I'll put it in my own words below....Today I actually took out a forward contract so I've gone through it all with HiFX and now understand exactly how it works. So...
Essentially, it's kind of like a buy it now, pay later, in that the Forex company ask you how much you want to exchange, then they buy that amount NOW and keep it for you until the end of the contract when you have to come up with money.
In terms of rate, they give you a very slightly lower rate than the current market rate because they calculate it based on the differences in interest rate between the Bank of England and Bank of Canada.
So...say you wanted to exchange £100k and you wanted the money in 6 months. You instruct them on this and they buy the CAD immediately and so you're locked into the rate. They then take a hit on the £100k that has come out of their account because that's £100k they're not getting interest on, BUT, they get interest on the CAD that they buy with it, based on the Canadian interest rate. This is why the difference in interest rates between England and Canada is important.
At this stage you pay them 10% of the total amount of GBP you want. This is to cover them for any loss they might make if you pull out of the contract without paying the full £100k and they have to sell the CAD back to the market.
In 6 months time the contract is up, you pay them the remaining 90% and they then release the amount of CAD that the £100k bought on the day you took out the contract.
So in effect it is in a way of locking in a rate if you're worried that the exchange rate could become less favourable and you know you need a particular amount to make your move to Canada viable.
Essentially, it's kind of like a buy it now, pay later, in that the Forex company ask you how much you want to exchange, then they buy that amount NOW and keep it for you until the end of the contract when you have to come up with money.
In terms of rate, they give you a very slightly lower rate than the current market rate because they calculate it based on the differences in interest rate between the Bank of England and Bank of Canada.
So...say you wanted to exchange £100k and you wanted the money in 6 months. You instruct them on this and they buy the CAD immediately and so you're locked into the rate. They then take a hit on the £100k that has come out of their account because that's £100k they're not getting interest on, BUT, they get interest on the CAD that they buy with it, based on the Canadian interest rate. This is why the difference in interest rates between England and Canada is important.
At this stage you pay them 10% of the total amount of GBP you want. This is to cover them for any loss they might make if you pull out of the contract without paying the full £100k and they have to sell the CAD back to the market.
In 6 months time the contract is up, you pay them the remaining 90% and they then release the amount of CAD that the £100k bought on the day you took out the contract.
So in effect it is in a way of locking in a rate if you're worried that the exchange rate could become less favourable and you know you need a particular amount to make your move to Canada viable.
Mar 1st 2016, 9:08 pm
#20
Joined: Aug 2005
Posts: 14,227
Re: Forward contracts
Hi folks, thanks for everyone's input. Pulaski was quite correct in terms of how it works. For anyone confused, I'll put it in my own words below....Today I actually took out a forward contract so I've gone through it all with HiFX and now understand exactly how it works. So...
Essentially, it's kind of like a buy it now, pay later, in that the Forex company ask you how much you want to exchange, then they buy that amount NOW and keep it for you until the end of the contract when you have to come up with money.
In terms of rate, they give you a very slightly lower rate than the current market rate because they calculate it based on the differences in interest rate between the Bank of England and Bank of Canada.
So...say you wanted to exchange £100k and you wanted the money in 6 months. You instruct them on this and they buy the CAD immediately and so you're locked into the rate. They then take a hit on the £100k that has come out of their account because that's £100k they're not getting interest on, BUT, they get interest on the CAD that they buy with it, based on the Canadian interest rate. This is why the difference in interest rates between England and Canada is important.
At this stage you pay them 10% of the total amount of GBP you want. This is to cover them for any loss they might make if you pull out of the contract without paying the full £100k and they have to sell the CAD back to the market.
In 6 months time the contract is up, you pay them the remaining 90% and they then release the amount of CAD that the £100k bought on the day you took out the contract.
So in effect it is in a way of locking in a rate if you're worried that the exchange rate could become less favourable and you know you need a particular amount to make your move to Canada viable.
Essentially, it's kind of like a buy it now, pay later, in that the Forex company ask you how much you want to exchange, then they buy that amount NOW and keep it for you until the end of the contract when you have to come up with money.
In terms of rate, they give you a very slightly lower rate than the current market rate because they calculate it based on the differences in interest rate between the Bank of England and Bank of Canada.
So...say you wanted to exchange £100k and you wanted the money in 6 months. You instruct them on this and they buy the CAD immediately and so you're locked into the rate. They then take a hit on the £100k that has come out of their account because that's £100k they're not getting interest on, BUT, they get interest on the CAD that they buy with it, based on the Canadian interest rate. This is why the difference in interest rates between England and Canada is important.
At this stage you pay them 10% of the total amount of GBP you want. This is to cover them for any loss they might make if you pull out of the contract without paying the full £100k and they have to sell the CAD back to the market.
In 6 months time the contract is up, you pay them the remaining 90% and they then release the amount of CAD that the £100k bought on the day you took out the contract.
So in effect it is in a way of locking in a rate if you're worried that the exchange rate could become less favourable and you know you need a particular amount to make your move to Canada viable.
http://britishexpats.com/forum/canad...apital-618074/
Note post 11 / 12
