Forward Cover (FEC) 

Forward CoverA Forward Exchange Contract (FEC) is like a special deal in the money world. It's used by individuals and businesses who deal with different types of currencies other than ZAR. 

Imagine you're going on a trip, and you know you'll need some foreign money, like Euros or Yen. But you're worried that the price of foreign money might change before you go. So, you make a deal with someone who has foreign money: you agree to buy a certain amount of their foreign money at today's price, and they promise to give it to you on a specific day in the future, no matter how the price changes.

This special deal is called a Forward Exchange Contract. It's like making a promise to exchange your money for foreign money, at a set price on a future date. People do this to avoid surprises. For instance, if you're a business that buys and sells things in different countries, the value of money can go up and down, which could make you lose money. By making this promise, you can lock in the price and protect yourself from these ups and downs.

Here's how it works:

Let's say you’re buying a property in Portugal, and you're going to have to make 3 stage payments over the next 12 months. The price is in Euros. You're afraid that the Euro might get more expensive, and you'll end up paying more, in rand terms, when you buy the Euros. So, you took a FEC at today's price, which you'll use to pay the stage payments later. This way, even if the Euro price goes up, you won't have to pay more, in rand terms, because you've locked in the price with the Forward Exchange Contract.

One thing to bear in mind is that you will have to pay a margin when booking the FEC - normally 10 -15% of the whole amount for which you have taken the FEC.

But, just like any deal, there are pros and cons. The good part is that you're protected from surprises. If the Euro price goes up, you're safe because you locked in the lower price. However, if the Euro price goes down, you might end up paying more than what you would have, if you had waited. It's a bit like buying something on sale and then finding out it's even cheaper later on.

In short, a Forward Exchange Contract is like a money promise. It's used by businesses and individuals who want to avoid surprises when dealing with different types of currencies. It helps them to lock in a price today for exchanging money in the future, which can be really handy.

What is a forward cover in foreign exchange?

A forward cover is a type of contract that allows an individual or a company to lock in a specific exchange rate for a future transaction. This protects against potential currency fluctuations and helps manage foreign exchange risks.

How does a forward cover work?

A forward cover is a binding agreement between a customer and a bank to exchange a specified amount of one currency for another, at a pre-agreed exchange rate on a future date. The customer pays a deposit, known as a margin, to secure the agreed rate.

Who can benefit from a forward cover?

Anyone who needs to make or receive a foreign currency payment in the future can benefit from a forward cover. This includes individuals, importers, exporters, and companies with overseas subsidiaries.

What is the advantage of a forward cover?

The main advantage of a forward cover is that it provides protection against currency fluctuations. By locking in an exchange rate, customers can budget accurately and minimise the impact of unfavourable exchange rate movements.

How long does a forward cover last?

A forward cover can last for any period agreed upon between the customer and the bank, typically ranging from one week to one year.

Can I cancel a forward cover?

Yes, customers can cancel a forward cover if they choose not to proceed with the transaction. However, the customer may incur a cancellation fee, and they may also need to pay back the margin deposit.

What happens if the exchange rate moves in my favour?

If the exchange rate moves in the customer's favour, they may choose to cancel the forward cover and buy the foreign currency at the prevailing market rate. This can result in a profit, but the customer may also incur a cancellation fee.

What happens if the exchange rate moves against me?

If the exchange rate moves against the customer, they will still be able to buy the foreign currency at the agreed rate, which can result in savings compared to the current market rate.

Who can I contact for more information on forward cover?

For more information on South Africa's Exchange Control Regulations, individuals and companies can contacts through our contact page, online chat, or call us on + 27 (0) 21 424 2936.