Advantages of forward FX trade
- Hedge against FX risk - agree on the exchange rate in advance
- Lock in stable and predictable cash flows because future payments and inflows in RSD terms based on import-export operations are known in advance
- Avoid a potential loss which may occur due to adverse exchange rate movement
What is an FX forward?
An FX forward is an FX trade on an agreed future date at a previously agreed and fixed exchange rate.
The exchange (incoming payment/outgoing payment) of RSD and foreign currency is executed in the future on the previously agreed date.
The exchange rate at which FX trade is executed is called a forward rate.
In order to enter into the transaction, it is necessary to:
Open an account with Erste Bank
Enter into a Framework Agreement
Complete a Client Categorisation Questionnaire
Be approved a limit (amount and period)
In January, you export some goods worth EUR 100,000 with an agreement to collect for the goods in February.
During the month between the goods delivery and collection, the exchange rate of RSD against EUR may vary, leading to uncertainty in business operation and planning, especially taking into account that most of your liabilities are paid in the domestic currency - RSD.
In order to hedge against FX risk, you enter into a forward agreement immediately in January, when the exchange rate at which you will sell EUR 100,000 collected based on exports in February is fixed.
Thereby, you will eliminate a potential loss from adverse exchange rate movement.
On the other hand, if you import goods and you have to effect international payments in the future period, you may enter into a forward agreement in advance, agreeing on and fixing the exchange rate at which you will buy EUR for the settlement of your liabilities in a selected future moment, when required.
Thereby, you will free yourself from the risk of decreasing RSD value and subsequent increasing costs for the payment of imported goods or services
Risks associated with this financial instrument
The opportunity to enjoy the benefits of a falling exchange rate in the event of FX purchase or the benefits of a rising exchange rate in the event of FX sale is limited.
Change of a market exchange rate may lead to a decrease in the market value of the purchased financial instrument.
A sale of the purchased financial instrument may lead to additional costs, depending on the situation in the market.
