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Forward Contracts

How It Works


A Forward FX transaction is an agreement between your company and Square 1 Bank for the exchange of specific amounts of currencies at a designated settlement date in the future. The exchange rate applied in the Forward FX contract is agreed upon at the trade date.

The forward exchange rate is derived from the current market spot rate, time to maturity, and interest rate differentials between the two currencies.

No upfront fee.

Example

XYZ Company imports telecommunication equipment from a Canadian supplier at a cost of CAD 3 million. XYZ Co is invoiced and payment is due in 180 days (t+180).

XYZ Co: Buys CAD / Sells USD
Amount: CAD 3.0 MM
Forward Rate: 0.7575 

On the Forward maturity date (t+180) XYZ Co will exchange 0.7575 USD per each CAD received. In this example XYZ Co will exchange USD 2.2725 MM with Square 1 Bank and receive CAD 3.0 MM on t+180. XYZ Co. will then have Square 1 Bank wire the CAD 3.0 MM to the Canadian supplier.

Square 1 Bank can arrange drafts or wire payments for forward delivery at competitive rates to settle a company’s foreign currency payables. As well, a company’s foreign currency receivable payments may be directed through Square 1 Bank's network of correspondent banks for credit to a company’s US dollar account.

Considerations

  • Easily implemented for both future foreign payables and receivables.
  • Eliminates adverse fluctuations to currency exposure and locks in an exchange rate as of trade date.
  • Easily implemented as a series of forward transactions for recurring FX hedging needs such as payroll.
  • Typically FX Forwards are a liquid and transparent foreign exchange hedging tool.
  • Allows a client to keep allocated cash in its main operating currency until the time of settlement.
  • Provides fixed hedges and increased accuracy for foreign line items that impact budgeted financial statements.

To learn more, please contact Stasia Harris, SVP, Treasury Management.