This is the next post in our series, The SellerEngine Mailbag.
Every week, we answer your questions about Sellery, SellerEngine Plus, and Profit Bandit, as well as your general questions about selling on Amazon. Today our friends at World First.
“I’ve been hearing a lot about international sellers utilizing forward contracts. Is this a good option for me, too?” –Jim
Keep reading to find out the answer!
Clients selling on an international platform are always subject to the movements of the foreign exchange market. Using World First to transfer your funds back to your local currency is a great way to avoid risk and be assured that you are receiving top notch rates. You can gain even more peace of mind by exploring a forward contract or a flexible forward contract as an option.
World First refers to forward contracts as the Buy now, pay later option – it’s all in the name. It gives you the option to lock in an exchange rate with your dealer in advance for your incoming funds from abroad.
The major advantage of a forward contract lies in budgeting. If you make a transfer as the funds come in, you’re taking a chance with whatever the rates happen to be that day. By setting a forward contract, you know exactly what rate to expect, no matter what the exchange rate is when the funds come in to your account.
So what is a flexible forward contract?
A flexible forward contract allows you to fix exchange rates on a lump sum and then use that balance of funds to make transfers as your revenues come in, all at the same fixed exchange rate.
How does it work?
To secure the forward contract you may need to pay an initial deposit, then the balance of the total contract will be due at the end of the agreed contract time. The deposit covers the risk World First takes by securing the rate you want for the future date. Your designated World First dealer will talk you through the ins and outs of the process as you are deciding on a rate.
Consider this example: An international seller, Dave, is looking to repatriate 200,000 EUR to US dollars over the next three months. He calls his dealer, books a flexible forward, and relaxes – no more daily rate checking for him. Dave and his dealer agreed to a 1.1600 exchange rate. At the end of month one, he is ready to bring back 50,000 EUR. He draws down from his forward contract, using that rate, and gets $58,000 USD and be on his way. It just so happens that the rates had moved out of his favor during this period, down to 1.086. If Dave would have used the spot (or the on-the-day) rate, he would have only received $54,301 USD for his 50,000 EUR. That’s a saving of about $3,700.
Are there any restrictions?
World First will book a forward under the condition that you are locking in at least $50,000 for a minimum of two months. Other than that, the sky is the limit. It’s generally recommended that international sellers book a forward for a maximum of six months ahead.
It’s important to remember that the financial market is a volatile one – and it moves both ways. This strategy can provide peace of mind and stop the hassle and stress of speculating what your rate will be in a few days’, weeks’, or months’ time. A forward contract is not a guarantee that the market won’t move against you, but it does provide you with a more organized plan for market movements.
If a forward contract seems like a great option for you, or you’d like to learn more about international payments, check out World First and their services here.