FX forwards

In general, often when people discuss foreign exchange (FX) transactions the option of a forward is raised. On this page we describe how a forward works.

What is a forward contract?

  • A FX forward is a contract to buy or sell a stated amount of a given currency at a specific price on an agreed date or range of dates in the future.
  • Barclays International offers two types of forward contracts – a fixed forward and an option dated forward:
    • A fixed forward contract is where a client sells one currency, in exchange for a different currency, for a set amount, at a specific price, for delivery on a specific date in the future.
    • An option dated forward contract is where a client sells one currency, in exchange for a different currency, for a set amount, at a specific price, but for delivery between two dates in the future.
  • For both a fixed forward and an option dated forward, the contract is binding on both parties.

For example, if you wanted to buy a house in six months in the UK in sterling and were funding the purchase from a sale of a property in France in euros, and you wanted to take advantage of the current exchange rate from euro to sterling, you could use a forward. So no matter what happens to the exchange rate in the next six months you would pay the set rate you have agreed rather than the market rate at the time.

However, you have to be sure, as the forward contract is legally binding so even if the house purchase fell through, you'd still be obligated to exchange the currency.

How is a forward calculated?

A forward rate is calculated with reference to the difference between the interest rates of the two countries involved, or the interest rate differential as it is formally known. It is not a prediction of where the spot FX rate is likely to be on the future date.

For example, in May 2011 the cost of borrowing euro in the money market is higher than the deposit interest rate for sterling, as interest rates are higher in Europe than they are in the UK.

In the above example, to arrange a FX forward, Barclays International is effectively borrowing euros on behalf of the client in order to convert to sterling now to secure the current exchange rate.

Barclays International is earning a lower rate of interest holding the sterling deposit for the next six months compared to the rate of interest we are paying to borrow euro for six months. The difference between the two is the interest rate differential and in this situation the difference is charged to the client by building it into the forward exchange rate itself. This is why it currently appears that the six month forward rate for converting euro to sterling is higher (and therefore less favourable) than the rate to convert euro to sterling for value spot (two days).

However, if the reverse was the case and the client was looking to convert sterling to euro for a six months forward, we would be earning a higher rate of interest holding the euro deposit for six months than they are paying to borrow sterling for six months. The interest rate differential in this situation is credited to the client by building it into the six month forward exchange rate. The six month forward rate would therefore appear more favourable than the sterling to euro spot rate.

Can I conduct a forward immediately?

Not immediately.

If you are not an existing client of Barclays International then you will need to apply for one of our banking services. Once you have an account with us a formal facility would need to be arranged before a forward transaction can take place. This entails some documentation to be read and signed and you would need to deposit some cash collateral.

Why do I need to deposit collateral?

This is to cover the settlement risk that Barclays International has. In the previous example, if the sale of the property in France didn't go ahead and you could not honour the forward contract, Barclays International would need to convert the FX forward proceeds back to euro to reverse the position at the prevailing market exchange rate at that time. If sterling had fallen against the euro, the shortfall would be taken from the collateral deposited. If however the shortfall is greater than the collateral deposited initially the client is liable for the additional cost of reversing the position.

How much collateral do I need to deposit?

This will depend on the currencies involved and the duration of the FX forward. Please contact us for more information.

Find out more about our FX services

If you are not currently a Barclays International client, but are interested in our FX services you will first need to apply for our banking services, which you can do by calling +44 (0)1624 684498† or accessing our online application by pressing the button below.

If you are an existing client and would like to find out more information please either contact your Relationship Manager, call us on +44 (0)1624 684498† or complete a call back request form.

Please note: access to our Treasury Specialists is via a three-way conference call. Clients who do not have a Relationship Manager and require a call with a Treasury Specialist or want to conduct a FX forward should either:

  • Hold assets of £50,000 with us, or
  • Intend to transact a minimum £50k (or currency equivalent)

The products and services described on this page are provided by the following companies, which are part of Barclays: Barclays Bank PLC in London and Barclays Private Clients International Limited in the Isle of Man, Jersey and Guernsey. For further information on these companies and Barclays please read the Important Information.