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Foreign Exchange contracts





Wynand
Foreign Exchange contracts

How many of you have anything to do with Foreign Exchange contracts or have any knowledge of the subject. Here is what I know. Please provide your additional knowledge.

If you have a debtor or creditor in a foreign country chances are that the exchange rate between your country and the foreign country will fluctuate. This means that with every fluctuation the amount that you owe or are owed to you change.

Let me explain this with an example. You live in the USA and you owe someone 100 Euros in Europe. The current exchange rate is 1 dollar for 1 euro. If the debtor pays you now you will receive 100 dollars. If the exchange rate changes to 2 dollars for 1 euro you will now receive 200 dollars if the debtor pays you. Do you see how quickly you can make or lose money by just being owed.

To cancel out this effect you can take out a foreign exchange contract. The FEC allows you to receive a fixed amount of dollars for an euro at a future date. The risk of the fluctuation is now transferred.
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