If you make regular payments abroad you will be leaving yourself at risk to potentially large exchange rate fluctuations and uncertain future costs.
Most people making regular payments abroad simply contact their bank or currency broker each month whenever they receive a bill and initiate a currency transfer there and then. They will typically use a conversion known as a spot contract.
A spot contract is an agreement to purchase currency at that day’s live rate. Banks will regularly offer a blanket rate for a day whilst smaller currency brokers will give you a second by second live rate. Using this method can leave you open for rates to move against you. However you can also benefit from a spot contract as rates can move in your favour on the day. Either way there is a certain element of risk as you cannot guarantee the rate you will receive.
When you are making a small currency transfer a fluctuation in the rates will not cost you too much however on a larger transaction a rate fall will cost you far more.
An Example:
Customer A
Wants to transfer £1,000.00 into Euros.
On Monday the rate offered by his currency provider is 1.09 giving him €1,090.00
On Tuesday the rate offered had fallen to 1.07 giving him €1,070.00
Had he have made the conversion on the Monday he would have been 20 Euro’s better off.
Customer B
Wants to transfer £10,000.00 into Euros
On Monday the rate offered by his currency provider is 1.09 giving him €10,900.00
On Tuesday the rate offered had fallen to 1.07 giving him €10,700.00
Had he have made the conversion on the Monday he would have been 200 Euro’s better off.
You can protect yourself against currency fluctuations and take a proactive step into ensuring how much currency you will get for your pounds. This can be done by fixing rates in what’s known as a forward contract.
A forward contract allows you to book an exchange rate for a specific amount of currency on a set date in the future. You can book a rate for up to two years in advance and secure it with a 10% deposit. The balance of the contract will then be paid closer to the maturity date. This type of contract is great for managing your foreign exchange exposure especially if you need to send a large amount of funds abroad at some point in the future either in small regular instalments or a large one-off transaction. One major benefit of using forward contracts is that it allows you to see what your currency costs will be over the next two years which allows you to budget and ensure you have funds readily available for each payment.
You will find that a currency broker will happily discuss the merits of using forward contracts whilst many banks simply do not provide this service to their loyal customers! Check our comparison tables to see the leading UK Currency brokerages and contact them today to see how they can help you to mitigate your currency exposure.
