Let me be clear. When I am speaking about currency trading, I am talking about professionally managed currency trades with the purpose of trading a good or service. However some people out there will choose to speculate or even gamble on the future position of some currencies. Some of those people claim to make a good living from such speculation. I say that you will never get a straight story from any such person. You will likely only ever hear about the rare wins and not hear about the frequent losses they incurr.
Professionally managed currency trades involve a systematic, non-emotional approach which combines market knowledge and the willingness to hedge your resources in a safe manner. If your business is dependent on profiting from the value of the dollar and not from your good or service, what are you doing in business?
Many business owners frequently do business in the currency spot market. This may be occurring because they don’t know where to turn. But many business owners think they know more than the market does. When I come across owners who do this, my first question is: And how is that going? Invariably, they respond with some story about losing thousands or even millions of dollars.
Why take a chance when there are so many tools available to you to help mitigate the currency risk? You have currency options, currency swaps, and the Big Kahuna: The forward currency contract.
The forward currency contract is a way of guaranteeing that you can buy or sell currency at a contracted rate in some time in the future. With a “forward”, you base that future price on market conditions, usually tied to interest rates. Interest rates are much less volatile than basing on the Spot market which is up and down and very hard to predict. When you have a forward currency contract, you have an agreement between you and your currency trader or bank that guarantees you will be paid the price contracted to. This takes all the guesswork out of foreign trading. Now you can concentrate on buying or selling your goods or services because you have predictability in future currency value.
It is true that your obligation is to honor your side of the contract by buying or selling at the specified time. Most traders will allow short time extensions under some conditions. You can also set up a swap for another contract. And you can sell the first contract and buy another one if you wish. There are a number of different kinds of forward currency contracts as well. So the negatives that people use when referring to “forwards” are not really good reasons to avoid them. They are more often than not emotional excuses to avoid something they are afraid of. Professional currency trading is about removing the emotion from the transaction.
Forward Currency Contracts are the smart play for those business owners who know how to manage currency risk.
