Services
Commonwealth Foreign Exchange offers a variety of services to suit the needs of your company. The primary services include spot transactions and forward transactions.
Spot Transactions
What is a spot transaction? A spot transaction is one in which one party agrees with another party to settle a specified amount of a certain currency in exchange for an amount of another currency determined by an exchange rate. As an example ABC Company delivers USD to Commonwealth and Commonwealth in turn delivers a specified currency at an agreed upon exchange rate as instructed by ABC Company. Spot transactions typically settle in T+2 which means the trade date plus two days.
Spot Transaction Order Flow:
Spot transactions are extremely simple with Commonwealth. For example, ABC Company contacts Commonwealth Foreign Exchange (via phone, fax, email or CFXonline) to request an exchange rate for a specific currency An exchange rate is provided to ABC Company at which time ABC Company and Commonwealth agree on a total settlement amount for the trade. ABC Company settles with Commonwealth and the contract is fulfilled as instructed.
Forward Contracts
What is a Forward Contract? Simply stated, a Forward Contract is a contract to exchange currencies at a future date. A Forward Contract is much like a spot transaction, but rather than T+2 it might be T+30 or T=120. Forward Contracts as a hedging instrument effectively exchange uncertainty for a known certain outcome. In other words, if a Forward Contract is booked at a certain exchange rate, you will be certain that that exchange rate will be the price you pay for that currency when the contract comes due regardless of any changes in market conditions. The Forward Contact can protect against losses if the currency moves against the underlying exposure, but at the same time, forwards forego and benefit (with the benefit of hindsight) if the currency moves in favor of the underlying exposure.
Why Use Forward Contracts
There are several reasons to use a forward contract. The use of a forward contract creates a known and certain exposure. Once the rate is locked in, that is the rate you get no matter what happens in the market. If you do not have a good gauge of the market or it appears the currency will not be moving in your favor, a forward contract will remove the uncertainty. Another reason you may wish to consider a forward contract is to avoid cash flow uncertainty. You will be sure of your expenditures with forwards locked in place. And finally, and maybe most importantly, locking in forward contracts allows focus on the core business and eliminates the need to engage in FX forecasting or speculation.
Deliverable Forward Settlement
Deliverable Forwards can be settled in two ways. The first is Physical Settlement. With Physical Settlement the full notional agreed upon is delivered each counter party. For example, as with a spot transaction, ABC Company delivers USD to Commonwealth and Commonwealth in turn delivers the specified currency at the agreed upon exchange rate as instructed by ABC Company. There is also a Non-Settlement option, in which case Commonwealth would not deliver the actual notional size of the contract, but instead pay/receive the difference between the forward rate of the contract and the current spot price.