Forward contracts: fixing the exchange rate between promise and deed, without betting on the currency
Between the preliminary contract and the deed, you hold a firm commitment in euros and resources in another currency: that is a currency position, one you bear without having chosen it. A forward contract fixes today the rate of a conversion that will take place later. This dossier says what it commits you to, how to set its amount and date, and why waiting for a better rate is the real gamble.
By Jean Mascla, founder of Home SelectUpdated · 6 min read
What a forward contract does, and does not do
It locks today the rate of a conversion that will happen later, on a date you set, against a deposit paid at signature.
It does not seek to win. That is the most common misreading: a forward contract is not a bet on a rise or a fall, it is a tool that removes uncertainty. You will know, from the preliminary contract, what your purchase will have cost you in your own currency. The locked rate will be neither the best nor the worst of the period, and that was not the point.
A worked example
Take a purchase of 800,000 euros, costs included, funded in dollars, with a preliminary contract signed in March and a deed set for the end of June. If the dollar loses 5% against the euro in the meantime, the same purchase costs the equivalent of about 40,000 euros more; if it gains 5%, it costs as much less. On the major currencies, a gap of that size over three months is nothing unusual.
A forward contract removes both outcomes at once: the cost of the purchase in your currency is known from the preliminary contract, and it will not move again. The budget for costs, works and furnishing is then built on a figure, not on a range.
What it binds
It binds both parties, and that is what to understand before signing. If the sale falls through, you remain bound to buy the euros at the agreed rate. You will then sell them back at the prevailing rate, at a gain or a loss depending on how things moved.
Two rules: the amount and the date
They follow from this mutual commitment, each in one line.
Hedge only the amount actually due. Property price, acquisition costs, and nothing more. Over-hedging turns a protection into a speculative position.
Set the maturity on the deed’s deadline, not on the hoped-for date. A three-week slip is ordinary in a French acquisition, between the municipality’s reply to the notice of intention to sell and the issuing of the loan offer. Too short a maturity forces a rollover, which costs.
Megève, Alpes & lacs
The three strategies, and who each suits
Converting immediately removes the risk and the potential gain with it. It is the route for someone holding the funds from the preliminary contract, and it has the merit of closing the subject.
The forward contract locks the rate without tying up the money. It is the route for the common case: funds arriving later, a sale already committed, a known date.
Staged conversion spreads the exposure across several dates. It removes nothing but it smooths, and it suits those who want neither to lock everything nor bear everything.
Why waiting is the real risk
This is the counter-intuitive point, and it deserves stating plainly. Deciding to wait for a better rate looks like prudence and is not: you are speculating with the money of a purchase already signed, on a calendar imposed by others.
On the day of the deed there is no alternative left: you convert at whatever rate applies. It is the one moment in the entire operation when you have no bargaining power at all, and it is the moment waiting leads you to.
The question of the currency calendar is therefore settled on the day of the preliminary contract, not on the day of the deed. It supposes the accounts are already open, which takes weeks, and knowing who to entrust the conversion to.
What Home Select organises for the currency side of your purchase
Financing is prepared before the search. From the first meeting, your Home Select property finder puts you in touch with a broker used to non-residents, so that your offer arrives financed and the bank’s calendar fits within that of the preliminary contract.
Bank, currency, paperwork: we introduce the partners who handle these subjects every week, and we make sure the bank, the notaire and the currency provider receive the same documents. Each acts under their own responsibility; our role is that nothing is missing on the day the money must move.
Frequently asked questions
What happens if the sale falls through?
You remain bound to buy the euros at the agreed rate: a forward contract binds both parties. You will then sell them back at the prevailing rate, at a gain or a loss depending on how things moved. That is why you hedge only the amount actually due, never more, and why the maturity is set on the deed’s deadline and not on an optimistic date.
Do you pay anything when the contract is signed?
A deposit, usually, securing your commitment until maturity. Its amount depends on the provider, the currency and the term. It is not a fee: it is deducted from the sum due on conversion day. Also ask what happens if the rate moves sharply against you during the period, some contracts providing for a top-up.
Is it better to convert at once or in stages?
It depends on one thing: when your funds are available. If you hold them from the preliminary contract, converting at once removes the risk and closes the subject. If they arrive later, a forward contract locks the rate without tying up the money. Staging is a compromise for those who want neither to lock everything nor bear everything, and it reduces exposure without removing it.
Is a forward contract a bet on the currency?
It locks today the rate of a conversion that will happen later, on a date you set, against a deposit paid at signature. It does not seek to win. That is the most common misreading: a forward contract is not a bet on a rise or a fall, it is a tool that removes uncertainty. You will know, from the preliminary contract, what your purchase will have cost you in your own currency. The locked rate will be neither the best nor the worst of the period, and that was not the point.
Is waiting for a better exchange rate prudent?
This is the counter-intuitive point, and it deserves stating plainly. Deciding to wait for a better rate looks like prudence and is not: you are speculating with the money of a purchase already signed, on a calendar imposed by others.
How much can a currency move cost between the preliminary contract and the deed?
Take a purchase of 800,000 euros, costs included, funded in dollars, with a preliminary contract signed in March and a deed set for the end of June. If the dollar loses 5% against the euro in the meantime, the same purchase costs the equivalent of about 40,000 euros more; if it gains 5%, it costs as much less. On the major currencies, a gap of that size over three months is nothing unusual.
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