Protect Your Profits with Foreign Exchange Forwards

When you run a business, there are many things you can control to ensure its success—and some things you can’t. For example, if you buy or sell internationally, exchange rates can change between the time you agree on a price and when the payment settles. If you’re purchasing products from other countries, you could end up paying more than expected. If you’re selling, you could collect less than you anticipated, negatively impacting your bottom line. 

That’s where a tool called foreign exchange forwards comes in. Let’s explore what they are and how they can eliminate this type of risk—giving you greater control over global transactions.

What Is an FX forward?

Offered by some banks, including Banner, FX forwards are contracts that allow you to lock in an exchange rate for a future transaction to protect your profits when buying or selling globally.

An FX forward provides you with predictability and eliminates risk regarding how much you will pay or be paid. It’s a way to protect your business from currency fluctuations and ensure you know exactly what you’ll pay or receive in your home currency. It’s important to note that forward rates can differ slightly from the current market rate. That’s because they reflect interest rate differences between the two currencies. 

Avoid Surprises with FX Forwards for Accounts Payable

Let’s say a U.S. food importer agrees to pay an Australian supplier in 60 days. The importer likely budgeted the purchase in U.S. dollars, but the invoice they receive may be in Australian currency. If the exchange rate changes unfavorably before the importer pays the invoice, they could end up paying more than they planned. By using an FX forward, they lock in the exchange rate at the time of the agreement, ensuring the cost is what was expected.

If you import goods or services, FX forwards can help you do more than protect against rising costs due to currency changes—they are a powerful tool for building stronger relationships. Paying suppliers in their local currency means they don’t have to add a cushion to protect their profits. By eliminating risk for both parties, operations are streamlined, and you may even receive more favorable terms.

Protect Revenue with FX Forwards for Accounts Receivable

Conversely, if you sell your products or services internationally, you can use FX forwards for accounts receivable as a powerful tool to safeguard against currency changes. For example, a U.S. hay supplier wins a new customer in Japan by quoting in yen. The buyer agrees to pay the supplier ¥46.5 million in 90 days. To protect their profit, the exporter locks in a forward rate at the time of sale.

Because of the interest rate gap between the U.S. and Japan, the forward rate includes a premium, boosting the final amount to ¥47 million. The result? The exporter secures their $300,000 revenue and gains ¥522,000 more than if they’d converted with the current market rate.

If you’re an exporter, using FX forwards for accounts receivable lets you invoice in the buyer’s currency without risking profit loss due to exchange rate changes. It’s a smart way to stay competitive and strengthen your position in the global marketplace while controlling cash flow at the same time.

Key Considerations for Using FX Forwards

• FX forwards don’t eliminate all risk, but they do remove one major uncertainty: currency fluctuation. 
• Settlement dates can be flexible—either a fixed date (e.g., 30 days) or a date range if you need more flexible timing. 
• FX forwards are binding contracts but they can be sold in the market at any time using the prevailing FX forward exchange rate. You can expect the bank to secure any risk of loss with your existing line of credit, typically 10% or less of the amount of the contract.
• Additional reporting may be required depending on your business structure and size. Consult with a trusted tax advisor or accountant to understand the implications.

If your business pays or gets paid in foreign currency, FX forwards can help you plan with greater confidence and keep your profits protected. If you’re interested in learning more, our International Banking Specialists are here to help you explore how FX forwards could benefit your business.

Want more insights on doing business internationally? Read our blogs Making the Foreign Familiar and Four Tools to Support and Simplify Your Export Business.