Commonwealth Foreign Exchange offers a variety of services to suit the needs of your company. The primary services include spot transactions and forward transactions.
Cash Market Spot Transactions
What is a cash market spot transaction? A cash market spot transaction is one in which one party agrees with another party to deliver 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. Cash market spot transactions typically deliver in T+2 which means the trade date plus two days.
Cash Market Spot Transaction Order Flow:
Cash market spot transactions are extremely simple with Commonwealth. Once an exchange rate is agreed upon, the rate is locked in and the transaction is delivered within two days.
Cash Forward Contracts
What is a Cash Forward Contract? A Cash Forward Contract is an agreement to exchange a specific currency and deliver that currency at a future date. A Cash Forward Contract is much like a cash market spot transaction, but rather than T+2 it might be T+30 or T=120. Cash Forward Contracts as a hedging instrument effectively exchange uncertainty for a known certain outcome. In other words, if a Cash 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 Cash Forward Contact can protect against losses if the currency moves against the underlying exposure, but at the same time, these contracts forego and benefit (with the benefit of hindsight) if the currency moves in favor of the underlying exposure.
Why Use Cash Forward Contracts
There are several reasons to use a cash forward contract. The use of a cash 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 cash forward contract will remove the uncertainty. Another reason you may wish to consider a cash forward contract is to avoid cash flow uncertainty. You will be sure of your expenditures with cash forwards locked in place. Remember all cash forward contracts work the same as cash market spot transactions, however they are delivered at a future date. And finally, and maybe most importantly, locking in cash forward contracts allows focus on the core business and eliminates the need to engage in foreign exchange forecasting or speculation.