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Posted October 19th, 2011 by Charles Purdy

Currency talk: How spot and forward contracts work

No matter what your situation or budget, currency exchange specialist Smart Currency Exchange will be able to help you. They have different finance contracts to suit different time scales and budgets and will talk you through each one so you can decide which is best for you. Typically, buyers will need to move money either straightaway or at some point in the future.

If you need to transfer funds abroad as soon as possible, Smart Currency Exchange will offer you a spot contract. This could even be done on the day you first contact Smart, over the phone. Once you have verbally agreed with the trader on a rate and amount, then the contract will be set up for you. All you then need to do is instruct your bank to transfer the agreed amount into Smart’s client account. The money is then ready for you to use there and then.

The spot contract is a great option for those who need to make one-off payments; this could be for a deposit on a house abroad or to send money to another country quickly for any other reason. While the nature of spot contracts mean you don’t wait for a more favourable future exchange rate, Smart should still save you money as their rates are typically up to 4 per cent better than those you will be offered by a high street bank. Smart can also reduce or eliminate any transfer fees that you might otherwise have to pay.

A forward contract is beneficial if you need to make a future transfer or regular payments abroad. The contract means you can fix an exchange rate today for a payment at a specified date in the future. Typically, Smart will require a 10 per cent deposit of the total value of the future transaction to do this. You can also fix the rate you get for regular transfers over a set period – ideal for budgeting when you make monthly mortgage payments or receive a UK pension while living abroad. Having the ability to secure a currency rate for a transaction, or series of transactions allows, you to budget and protect your money against fluctuating exchange rates.

As an example, if you know you’ll need to transfer €150,000 to Spain to pay for a property, but won’t need to do so for a number of months, you can fix an exchange rate you’re happy with today for the future transaction. This way, you know how many pounds you’ll need to buy €150,000, regardless of how much the exchange rate has changed.

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