Two different types of currency contract
When you buy foreign currency, there are two broad contract types, spot and forward:
- Spot Contract
A spot contract secures a currency at a current live rate with a view to take
delivery of the required currency within two days. The funds are for immediate delivery on receipt of the client's cleared funds.
These contracts are typically used for immediate requirements, such as: deposits on cards, property deposits and purchases,
emigration and immigration transfers and most commercial uses.
- Forward Contract
A forward contract allows you to buy at a fixed exchange rate for delivery of the currency
at some specific date in the future. You can book a fixed rate for most currencies for delivery at some stage in the future.
This is normally only sensible for money needed within the next 12 months.
The exchange rate is agreed between you and your dealer. You will have to pay a deposit â€“ ranging from 5% to 15% of the amount you wish to buy.
The exact amount depends on the currency, the volatility and the duration of the contract â€“ i.e. the longer the time, the larger the deposit.
The balance is paid when you draw down the currency. You may do this at any time during the period of the contract and in any size quantities
(up to the value of the contract).
To a purchase a contract, you will first have to open an account with the dealer, usually providing 2 forms of ID
such as a passport and a utility bill, sign the contract and pay the deposit.
Funds will then be paid to you directly from the dealerâ€™s client account.
You do not have to take the currency if you do not wish to do so. However, the currency that you have bought
would then be sold at its value at that time. Any loss then suffered would be deducted from your deposit, with the balance returned to you.
Additionally, there is normally a cancellation fee payable. If the currency sells for more than you paid for it,
you should directly benefit from any profit.