Sending money later in the year? Here’s how forward contracts work
If you send money overseas by using an international money transfer (IMT) provider, chances are you’ve seen the term ‘forward contract’ before.
A forward contract is a feature offered by providers which allows you to lock in an exchange rate for a future transfer. This allows you to hold a favourable rate and not miss out on a good exchange deal when you are not yet 100% ready to send money overseas.
In a volatile market like in currency exchange, it’s no surprise that there are days where the value of the Australian dollar goes down against popular currencies like USD, GBP, HKD and SGD. If you are someone who frequently sends money overseas, then you may watch the currency exchange graph daily to catch any fluctuation. Much like a game of Monopoly, if there is a moment where the deal is favourable you jump on it.
With a forward contract you can lock in a good rate and choose to do the money transfer later. Depending on the IMT provider you go with, that exchange rate is held for you for several months. Though you may have to pay an initial deposit up front and then the rest of the money when you want to make the transfer.
Here’s a typical example: you are planning to send money overseas to help pay for a family member’s wedding. The wedding is still about a year away but when you checked the daily currency exchange rate, you noticed that for $1 AUD you got $0.78 USD, which is the highest it’s been in a while. Using an IMT provider you lock in the exchange rate of 1 AUD for 0.78 USD, then several months later when you want to make the transfer you get that rate even if the future exchange rate is much lower.
It is that easy. Again, depending on the IMT provider you go with your forward contract may last between three months and a year. When you are looking at a provider to go with, make sure to read their forward contract rules.
If you are looking to send money overseas soon, check out Mozo’s IMT tips to learn some money saving tactics.
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