Forward exchange contracts are used to secure a rate today for settlement at some time in the future, usually longer than two business days. Methods of delivery that can take place with a FEC are:
Early delivery – When forward exchange contract is used before the maturity date of a fixed contract or during the fixed period of a partially optional contract. Delivery will take place on a ‘swap’ basis.
Extension – When forward exchange contract is used before the maturity date of a fixed contract or during the fixed period of a partially optional contract. Delivery will take place on a ‘swap’ basis.
Cancellations: When an importer is unable to use the forward exchange contract. If an order is cancelled, the forward exchange contract must be cancelled at the prevailing spot exchange rate, which can result in financial loss.
Types of Cover
There are two distinct 'legs' in any NAD/foreign currency deal. The importer/exporter can cover either one of the two legs of the transaction, or both of them, depending on the client’s view of the currency market.
The customer can opt for:
- Foreign currency / Namibia dollar cover.
- Rand/Namibia dollar cover.
- Rand/any other foreign currency cover.
FEC – Advantages
They cater for a diverse type of commercial and financial transactions and both importers and exporters can make use of it.
The company is protected against unfavourable exchange rate fluctuations.
Budgeting and costing are accurate.
FEC – Disadvantages
Once a customer has covered a transaction with forward exchange contract, it cannot take advantage of any favourable exchange rate movements.
Early deliveries, extensions and cancellation during the fixed period of the foreign exchange contract can result in a financial loss.
The period of cover should not exceed 12 months at a time. Documentary evidence is needed to establish the FEC.