Product guide
Mastering FX Forwards
Introduction to FX Forwards
One of the challenges of operating internationally is the uncertainty that comes with fluctuating currency values. Say you need to exchange GBP to EUR every 3 months for a supply order. If the value of EUR increases before you exchange, you may spend more GBP than you expected.
That's where forward contracts come in. They help reduce this risk by locking in an exchange rate for transactions you know you'll make.
In this guide, you’ll find everything you need to know to set up and manage FX Forwards contracts right from your Revolut Business account.¹
¹You may only use our FX Forward Services for commercial purposes. You may not use them for investment or speculative purposes. This means you can only book contracts to facilitate payments for identifiable goods, services, or direct investments.
The basics of forward contracts
What are forward contracts?
Forward contracts are binding exchange agreements between your business and a financial institution or broker. Both parties agree to exchange a specific amount between 2 currencies at a fixed rate. The transaction takes place on a set future date, or within a defined time window.
With Revolut Business, you can book forward contracts in 10+ supported currencies to lock in exchange rates up to 2 years in advance.
Currency exchange vs forward contracts
Booking forward contracts is different from making spot transactions, or exchanging currencies at their current market price. Let’s compare them.
Definition
Settlement time
Pricing
Commitment
²With Revolut Business, you can cancel your forward contracts at any time. We'll just ask you to pay the markup fee, plus any mark-to-market difference, which is the difference in the contract's value between the time of booking and the date of cancelling. We’ll return the remaining part of the initial deposit to your account.
Contract types
There are 2 main types of currency contracts you can book:
- Fixed contracts: you can only settle the amount of the contract on 1 specific future date
- Flexible contracts (or window contracts): you can settle the amount between 2 agreed future dates, in 1 or more drawdowns. This means you can exchange all or part of the contract amount within a specified time window
About FX Forwards
Is FX Forwards right for my business?
Your business may benefit from FX Forwards if you:
- have tight profit margins and operate in competitive environments
- don't have the flexibility to reprice your goods or services based on currency fluctuations
- have long payment terms with clients and short ones with suppliers, making cashflow challenging
- are spending too much time tracking exchange rate fluctuations
- have long-term projects, with pricing agreed upon months or years in advance
- import or export goods and services
- operate internationally, and transactions with vendors abroad expose you to currency risk
Benefits of using FX Forwards
Secure exchange rates
Stay ahead of currency fluctuations by setting exchange rates up to 12 months in advance as standard, or up to 2 years in advance with a credit check.
Optimise your cashflow
Book contracts to exchange between USD, GBP, and EUR — or pair these with 8 other supported currencies. This means you don’t need to move money between key markets, and you can manage your cashflow more effectively.
Create custom contracts
Immediately access up to £500k in active forward contracts. You can request larger contracts via the web app, or by speaking with our FX Forwards team. Hold multiple contracts at once, and book new ones whenever you need to.
Control your portfolio
Manage your FX Forwards portfolio online, 24/7. View rates, set dates, and book contracts via the web app in minutes.
Access 24/7 support
If you need higher limits, longer contract times, or extra support, contact us anytime via our in-app chat. Our FX Forwards team is always here to help.
Never miss an update
We send daily reminders via email and push notification when a time-sensitive deposit is pending on your portfolio. Our FX Forwards team will also reach out to you so you don't miss the deadline.
Things to note before getting started
- Forward contracts are binding, meaning you'll need to exchange at the agreed rate, even if market rates are more favourable when the contract's end date approaches. You can cancel, but you may need to pay the mark-to-market difference (the difference in the contract's value between the time of booking and cancelling) and a markup fee
- If the market moves in an unfavourable direction, we may issue a margin call (a request for an extra deposit to cover our risks). We'll refund this at maturity (when the contract is fulfilled)
Getting started with FX Forwards
How do I set up FX Forwards?
To help you simplify your approach to creating forward contracts, we’ve developed the IDEA framework:
| Identify your currency exposure |
| |
| Develop your plan to hedge currency risk |
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| Execute your strategy |
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| Assess your performance |
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Sample use case for FX Forwards
Seeing FX Forwards in action
Here’s an example of how a fictional business, Wooden Toys Ltd, could have saved around £62k using FX Forwards.
The offer's made
Imagine a UK-based wholesaler of children's toys called Wooden Toys Ltd. They purchase their wooden toys in USD from China, and sell them to wholesale clients in the UK, who pay them in GBP.
A fictional retailer called Lewis & Johns approaches Wooden Toys Ltd to purchase several hundred toys in January, for delivery in September. As the wooden toys market is very competitive, Wooden Toys Ltd quotes Lewis & Johns a price of £241,122 to purchase the toys based on a 10% gross margin at the prevailing GBP/USD market price, or spot rate, as reference.
The deal's sealed
On 12 January, Lewis & Johns agrees to purchase the toys at the fixed price of £241,122, and plans to pay Wooden Toys Ltd on 26 September.
That same day, Wooden Toys Ltd agrees with their Chinese supplier to purchase and pay for the toys on 26 September, at the fixed price of $300,000.
On 26 September, the GBP/USD rate falls to 1.0672. When Wooden Toys Ltd goes to pay their supplier the $300,000, they now need £281,109 instead of the previous estimation of £241,122 due to the fallen GBP/USD rate.
The cost breakdown
Cost of wooden toys (USD)
to be paid to the supplier
GBP/USD rate
Cost of wooden toys (GBP)
Margin applied by Wooden Toys Ltd
Price quoted to Lewis & Johns (GBP)
Profit for Wooden Toys Ltd
Money received from Lewis & Johns (GBP)
Loss to Wooden Toys Ltd
This example is for illustrative purposes only. Savings aren't guaranteed. While your locked-in rate protects you against unfavourable market movements, it also means you won't benefit if the market moves in your favour. FX Forwards fees or exchange fees apply.
Lessons learned
Because Wooden Toys Ltd couldn't increase prices for Lewis & Johns, they had to absorb the loss, wiping out their margin and pushing them into the red.
If Wooden Toys Ltd had created a forward contract for $300,000 at the original spot rate, they could have:
- protected their original profit margin, as the spread fee and temporary deposit would have been a small cost in comparison to the loss
- avoided losing £39,987 due to the fallen GBP/USD rate
Opportunity cost of not using FX Forwards: -£61,907.
A look at pricing
The basics of pricing
When creating a forward contract, financial institutions and brokers offer you a forward exchange rate, which you can lock in for a future transaction. This rate is different from the current exchange rate (or spot rate), which you can use for day-to-day exchanges.
To determine the final fixed exchange rate (or net rate) for each contract, providers combine the forward rate with a contract fee or markup.
When you book a contract with us, you get transparent pricing with no hidden fees. Let’s break down how we price FX Forwards, and compare our methods with other providers’.
How are forward rates set?
Financial institutions and brokers use something called forward points, which are determined by the market based on the interest rates between 2 currencies. If one currency has a higher interest rate, it'll typically be more expensive to borrow and cheaper to lend, affecting the forward points.
Providers can add or subtract these points from the current exchange rate of a currency pair to set forward rates. When forward points are in your favour, many providers will keep some of them from your final forward rate, resulting in a better deal for them and a worse rate for you.
At Revolut Business, we always include forward points in your final rate, which helps us give you the most competitive fixed rate for that contract.
Net rates in action
How net rates work, and help you save
Imagine the fictional UK-based wholesaler of children's toys, Wooden Toys Ltd, is considering 2 potential contracts from different providers: one with forward points, and the other one without. Let’s compare them.
GBP exchanged
Forward points
GBP/USD forward rate
Markup
GBP/USD final rate
USD bought
Rates and forward points are illustrative only.
How do they compare?
As the table shows, Contract B offers a better final fixed rate for Wooden Toys Ltd because the provider added forward points in their favour. Thanks to this, their GBP is worth $4,000 more than the same amount with Contract A, which doesn’t include forward points.
And that’s just for a single contract. Imagine how much you could save across all the contracts you book for your business by choosing a provider that offers forward points.
Protect your profits with FX Forwards
We hope this guide helped you understand how we price our forward contracts and how they can protect your global business finances from currency risk. For more information, visit our FX Forwards webpage.
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