Africa Money Exchange offer Forward Exchange Contracts (FEC's) across a wide range of major and exotic currencies.

Please contact our FX dealing desk for further information.

Forward contracts allow you to lock in an exchange rate immediately without having to pay for the purchased currency until a future date.

The forward exchange rate is calculated by using the current exchange rate plus an interest differential (being the difference between the interest rates on an annualised basis for the length of the forward contract).

The forward exchange rate is a function of the current exchange rate and interest rates of the two currencies involved and is not a forecast of the future direction of the exchange rate.

Forward exchange contracts usually require a deposit. This allows you to utilise the majority of your funds until the end of the forward exchange contract when the funds are exchanged.

A forward exchange contract allows you to reduce your exchange rate risk by locking in a rate now even though the actual transaction will only take place at a later date. In this way, you are able to 'lock' in a fixed rate now for future use and as a company you can be sure of the cost of your purchased currency before you actually need it.

Example

Many customers who import goods have to pay in foreign currency and are concerned that adverse exchange rate movements will increase the amount of local currency they will have to pay when they convert to foreign funds.

This risk can be managed using a Forward Exchange Contract (FEC).

A company plans to import goods from the United States into South Africa, with payment of 1,000,000 US Dollars to be made in 6 months time.

The currenct spot price is 7.00 so the USD can be bought at today's exchange rate of 7.00 and they would only have to pay ZAR 7,000,000.

However if the USDZAR exchange rate rises 10% between today and when they purchase the US Dollars in 6 months time to 7.70, then the South African Rand costs would increase to ZAR 7,700,000. This adverse exchange rate movement would cost the company an extra ZAR 700,000.

A Forward Exchange Contract can be taken our by the company to remove or reduce this risk.

The company decides they do not want to take this risk and would prefer to 'lock in' a rate today that will be used for the transfer in 6 months.

They do this by booking a 6 months USDZAR forward contract at 7.20 to buy USD 1,000,000 for ZAR 7,200,000.

This contract is binding on both parties and this rate is fixed going forward.

The extra 20 cent 'premium' above the spot rate is the 6 month annualised interest rate differential between USD and ZAR.