Forward Exchange Contract

• A simple method of covering exchange risk, without having to worry about unfavaourable movements in exchange rates
• Overcomes the problems in budgetting as you can now budget at a guaranteed rate of exchange
• No charges are payable so you save in charges

A forward exchange contract (or forward contract) is a binding obligation to buy or sell a certain amount of foreign currency at a pre-agreed rate of exchange, on a certain date. Contracts can be taken out for completion on an agreed date or at any point before the date (subject to terms and conditions).

The price of a forward contract is based on the spot rate at the time the deal is booked, with an adjustment, which represents the interest rate differential between the two currencies concerned.

For example, you need to buy US dollars in three months time. Say US interest rates are higher than S$ interest rates. The pricing principle assumes that HSBC buys US dollars now, paying for the dollars with S$, in order to meet our obligation to you under the contract in three months time. We pass on to you the benefit of the higher rate of interest we earn on the dollars. The adjustment to the spot rate means that the forward contract rate would be more favourable than a spot deal rate. The reverse would apply if US interest rates were lower than S$ rates.

You need to advise us of

• the amount, both currencies involved
• the expiry date and
• whether you would like to buy or sell the currency on the expiry date

Find out more about Currency Options and Spot Foreign Exchange to protect against foreign exchange risk.