Flexible Forwards

Certainty regarding exchange rates combined with flexibility

A Flexible Forward is the perfect solution for companies that make regular payments in foreign currencies. Or frequently receive foreign currencies and wish to convert them to euros. You get a guaranteed exchange rate for a certain period. You decide the amount you want to convert. The only requirement is that you convert the total amount before the end of the period.

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How does it work

It's very easy to enter a Flexible Forward. You state the period in which you expect to receive payments and the total amount you want to hedge. We give you a competitive exchange rate for the entire term that the flexible forward is fixed. If you approve the exchange rate, the flexible forward is confirmed. We charge an exchange margin for buying and selling foreign currency. This is included in the exchange rate of the flexible forward that we offer. So you don't pay any additional costs.

Pros & cons

Pros

  • You know in advance how much you pay or receive in euros.
  • You may execute multiple payments against the same exchange rate. You decide the timing and amount of foreign currency payments.
  • You are hedged against negative exchange rate fluctuations.
  • You do not always need to deposit initial collateral (this depends on your creditworthiness).
  • In contrast to an option contract, you don't pay a premium.

Cons

  • You don't benefit from favourable exchange rate fluctuations.
  • You are obliged to buy or sell the total amount before the end of the period. The flexible forward is not suitable if you are still at the tender phase.
  • If you terminate the flexible forward contract early, you may be subject to extra costs. The level of these costs depends on market value. If your flexible forward contract has a negative market value, then you are required to pay the difference.

Example

Mr Van Vliet is CFO of Blue Electronics B.V.. Blue Electronics operates internationally. The company imports specialised electronics from China and sells them. Both in and outside Europe.

Mr Van Vliet wants to optimise cash flows. Moreover, he wants to hedge the currency risk on four orders from China. The total purchase value is $ 800.000,- (US) dollars. The exact delivery dates are unknown, but they will be delivered over the course of the year.

Blue Electronics expects to make between three and seven payments (including a payment deposit)over a period of seven months, for a total amount of $ 800.000,- Mr Van Vliet wants to protect this amount against an increase in dollar value and secure the profit margins of Blue Electronics. To do this, he wants to fix the dollar price for the coming seven months. He also wants flexibility, as he is uncertain about the timing and amount of the individual payments.

During these seven months, Blue Electronics can execute dollar payments at any moment, for a total value up to $ 800.000,- This gives Blue Electronics a guaranteed purchase price.

After a month, Mr Van Vliet completes the first payment of $ 150.000,- for the first delivery from China. The second and third payments are completed after three months for a total amount of $ 550.000,-. The final delivery takes place after six months. Blue Electronics completes the final payment of $ 100.000,-.

Scenario 1

The dollar price increased in value over those six months. One dollar now costs € 0.90. Blue Electronics completed all payments at the favourable dollar price of € 0.85. Instead of paying € 720.000,- ($ 800.000 *0.90), Blue Electronics payed € 680.000,- ($ 800.000 *0,85). The flexible forward has saved the company € 40.000,-.

Scenario 2

The dollar price decreased in value over those six months. One dollar is now just € 0.80. Blue Electronics unfortunately does not benefit from the cheaper dollar using the Flexible Forward. Instead of € 640.000,- ($ 800.000 *0.80), Blue Electronics payed € 680.000,- ($ 800.000 *0.85).

How to save money on currency transactions?

Discover how to save money on your currency transactions
With the step-by-step guide in our brochure

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