Commonwealth

Protection from negative rate movements in the future

Forward Contracts

World First can let you fix the rate now for a point in the future (up to two years in advance of when you actually need to transfer funds). The benefit of forward contracts is that you will know the exact rate you will receive for a future transaction and are therefore protected from negative rate movements in the future. The downside to forward contracts is that whilst they offer you protection from negative rate movements, if the rates move in your favour you will still have to transfer funds at your pre-agreed rate.

Currency Options
World First was the first FSA authorised foreign exchange broker to offer these to private clients and we have unrivalled experience and products available to clients in this area.

Currency options allow you to protect yourself from negative rate movements in the future, but still allow you to benefit if the exchange rates move in your favour. They are for larger transactions above £100,000.

There are a number of different strategies but generally they work in one of two ways:

1) They enable you to guarantee a worst case rate. This worst case rate will always be inferior to the actual forward contract rate. The difference between these two rates effectively 'pays' for you to be able to benefit from a favourable move in the rate which can be unlimited.

2) They provide protection by giving you the option to purchase your currency at guaranteed ‘worst case rate’ for which you pay an upfront cost (premium). This is similar to an insurance policy.

What products are available?

Although there are ten strategies that are frequently employed, we have chosen three of the most widely used to describe here:

  1. The participating forward

Set a ‘worst case rate’ for your transaction on a future date. If on expiry the rates have moved in your favour you transfer half of your funds at the ‘worst case rate’ and half of your funds at the higher prevailing spot rate, giving you an average rate half way between the two. If the spot rate on the day is worse than your ‘worst case rate’ then you are protected and can transfer all of your funds at the ‘worst case rate’. Deposit required but no premium.

  1. The protection option

Set a ‘worst case rate’ for your transaction for a future date. If on expiry the spot rate is more favourable you will be able to transfer all of your funds at the higher prevailing rate. If the rate is worse on expiry you will have protected yourself with your ‘worst case rate’. This carries a premium but no obligation.

  1. The Risk Reversal

Similar to a Protection Option, however this structure allows you to reduce the premium or eliminate the premium completely by capping the ‘upside’ (the amount by which you can benefit if the rate on expiry is more favourable). If on expiry the spot rate is higher than your capped level you will transfer all of your funds at the capped rate. If the spot rate is between the ‘worst case rate’ and the capped rate you simply exchange funds at this level. If the spot rate is lower than the worst case rate you are protected at this level. Zero cost or reduced premium, deposit is required and the option carries an obligation.

 

To discuss Currency Options in more detail please contact World First and we will be happy to discuss your requirements and talk you through the various options available.

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World First Markets Limited is authorised and regulated by the Financial Services Authority.
Our Firm Reference Number is 477561

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