Foreign exchange rate volatility can severely impact businesses trading internationally. Businesses must therefore be aware of the unforeseen dangers when dealing in international markets as they can have a huge impact on future profits and cash flow.

If your company imports or exports goods, a small fluctuation in the exchange rate can have a considerable effect on your profits. Exchange rate movements should not be ignored as money may be lost if the exchange rate fluctuates between placing the order and paying for it. The longer the timeframe of the transaction, the greater the uncertainty.

Spot Contract

This is the agreement to buy or sell a certain amount of foreign currency at the current market rate for settlement in 2 business days time.

This is the agreement to buy or sell a certain amount of foreign currency at a pre-agreed rate on a certain date in the future. A Forward Foreign Exchange Rate is based on the spot rate at the time the deal is agreed which is then adjusted to reflect the interest rate differential between the 2 currencies involved.