The spot contract is the mainstay of foreign currency conversions.

Here is a quick overview of how they work and a brief mention of some potential alternatives. 

An on-the-Spot Deal

If you have an immediate need fora foreign currency conversion, you can ask your broker or other provider to issue you with an exchange rate quotation.

Assuming that you wish to go forward immediately and will be able to make settlement of the transaction within two business days, the chances are you will be issued with what is called a ‘spot rate’.

Once the funds have changed hands and conversion made, you can then send the funds to wherever you need them.

This is one of the most familiar forms of foreign money conversion and may work well in many business and indeed personal situations.

Limitations with Spot Contracts

Useful as spot rates and contracts are, there are many business situations where they may not be the ideal foreign exchange tool.

Take an example, such as where you need to issue a quotation to an overseas customer in their currency and you may or may not get the business. Even if you do get the contract, there may be a delay in signing on the dotted line and actually receiving settlement of the deal.

In that situation, when the money is finally received in the foreign currency concerned, the spot rate at the time to convert it may be significantly different to the one you used at the outset as part of your quotation assumptions. If the currency rate has moved against you, then you are going to suddenly find yourself with a lot fewer Australian dollars than you anticipated.

Hedging and Forward Contracts

An option you may have available to you as a complement to the traditional spot contract is called a forward contract.

There is nothing mysterious in this, it just means agreeing with someone like Forex Group, a forward contract rate - that means you will know exactly what exchange rate will be at the specific time in the future.

There are also situations where the forward contract might not be entirely suitable for your needs and a spot contract might be the better approach.

However, rather than go into a lot of detail in writing, why not give us a call to discuss your requirements? There is a science to utilising the right tools to lock-in foreign exchange rates and choosing the right approach for your business is critical. We would be only too happy to explain more about spot, forward contracts and other exchange rate approaches.

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