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Foreign Exchange Hedging
Spot foreign Exchange
Spot foreign exchange is defined as the exchange of one
currency for another at an agreed rate of exchange for settlement in two business days
Useful If
You have a currency requirement immediately
Features
- Available in all major and most minor currencies
- Agreed deal is legally binding on both yourself and the bank
- The spot rate of exchange is determined by the rate quoted
on the Interbank market
Advantages
- Easy to arrange
- Deal for immediate currency requirement
Benefits
- Deal may be transacted to allow advantage to be taken on
favourable exchange rate moves
Charges
- There are no fees but a contingent liability limit is
required
Foreign Exchange Contracts
Allows you to fix an exchange rate now for payment or
receipt of foreign currency at a given time in the future
Useful if
- You wish to eliminate the impact of adverse foreign exchange
movements
Features
Currencies, amounts and settlement date are agreed at the
start of the contract
The forward exchange rate is calculated by reference to
interest rate differences between the two countries and involves either deducting a
premium from or adding a discount to the spot rate of exchange
Agreed contract is legally binding on both you and the Bank
and must be settled on maturity
Advantages
- Easy to arrange
- Removes uncertainty of future currency value
- Allows you to lock into Cost/Profit
Benefits
- Offers peace of mind in times of exchange rate volatility
- Allows more accurate forward planning and budgeting
Charges
- There are no fees but a contingent liability limit is
required
Currency Options
Purchasing a currency option gives you the right, but not
the obligation, to fix an exchange rate now for the payment or receipt of foreign currency
in the future
A Currency Option provides specific exchange rate
protection whilst allowing benefit to be taken from any favourable movement in exchange
rates
Useful if
- You wish to eliminate the impact of adverse foreign exchange
movements , but wants to retain the ability to Take advantage of favourable movements
- You have balance sheet exposures.
Features
If the exchange rate moves favourably, you have bought the
right to walk away from the contract
If the exchange rate moves adversely, you can take up the
option at the predetermined rate
Available in most major currencies for amounts in excess of
£500,000 for periods of up to one year
Advantages
Removes uncertainty of future currency value
Benefits
- Offers peace of mind in times of exchange rate volatility
- Can be used in tender situations
- Can be sold back to the Bank
Charges
- An up front premium is payable based on various criteria at
the time of the deal and the exchange rate chosen
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