Our Forex Solutions
The IT client
As a leading provider of IT products and consulting services to the capital markets industry, our client’s global base means it is often paid in US dollars and has significant foreign exchange exposure.
We worked with the client to select the best forex product to protect them against adverse movements in the exchange rate - without missing out on favourable rates.
Advantages of the Zero Premium Cylinder
- Sets out a specified worst-case scenario
- Gives you a guaranteed protection rate for 100% of your FX exposure
- Means you benefit from favourable currency moves up to a specified limit
- Lets you choose to pay an optional premium to improve levels
Disadvantages of the Zero Premium Cylinder
- Upside protection is only as good as the best-case rate
- Worst-case protection level is lower than an equivalent forward
The scenario
Our client needs to sell $5 million three months from now and is buying euros.
The EUR/USD spot rate is currently 1.45. A client who sold $5 million today would receive €3,448,275.86.
With a product like the Zero Premium Cylinder, the client can take full advantage of any favourable move in the exchange rate down to 1.40. They can also protect themselves in case the rate goes above 1.50.
If the euro is trading above 1.50 (such as at 1.65) at the expiry date, the client is fully protected and can sell its dollars for €3,333,333.33.
If the euro is trading below 1.40 (such as at 1.39) at the expiry date, the client has to sell the dollars at 1.40 and will get a maximum euro amount of €3,571,428.57.
If the euro is trading between 1.40, and 1.50 at the expiry date, the client is free to trade at the prevailing market rate.
Alternatively, a client looking for a closer protection level could lock in protection at 1.48, and take advantage of a move down to 1.42.
The Food and Drink client
Our client is a leading Irish-based manufacturer and distributor of branded drinks. It distributes a number of its brands in the UK, receiving payment in sterling, and therefore has significant exposure to movements in foreign exchange markets.
This client was keen to protect itself against adverse movements in the exchange rate, but also wanted a premium-free product that would benefit it from some of the advantageous movements. Our Participating Forward represented the logical solution for this client.
Advantages of the Participating Forward
- Guarantees you a certain level of protection
- Benefits you up to a certain percentage if the rate moves in your favour
- Can be constructed at zero cost and structured off any protection level
- Can use an upfront premium to improve protection and participation level
Disadvantages of the Participating Forward
- Limited exposure to favourable changes in exchange rates
- Worst-case protection level worse than an equivalent forward
The scenario
- Our client needs to sell £1 million at the end of May, June and July and is buying euros.
- The euro/sterling spot rate is currently 0.877. With the Participating Forward, the client can protect its full exposure at 0.89 each month end and get 50% of its FX exposure to participate in any favourable move in foreign exchange rates.
- If the euro is trading above 0.89 at each of the expiry dates, the client is fully protected and can sell the full amount (for example £1 million) at 0.89.
- If the euro is trading below 0.89 at each expiry date (such as at 0.85), half of the exposure is made at 0.89 and the other half at the favourable market rate.
- This means the client would sell £500,000 at 0.85, and £500,000 at 0.89, which works out at an average rate of 0.87.
The Manufacturing client
As a provider of aircraft maintenance to some of the world’s biggest airlines, our client builds cash reserves in a number of different currencies.
This client wanted to sell its currency for an enhanced return, although they were in no hurry to do so, so our Dual Currency Deposit made perfect sense. They were also happy to convert at the agreed conversion rate, or in the spot market if currency conversion didn’t take place when the deposit reached maturity.
Advantages of Dual Currency Deposit
- Pays you a higher interest rate than the current base rate
- Lets you convert at higher exchange rates than those currently available
- Comes with no premium attached
Disadvantages of Dual Currency Deposit
- The deposit is set for a fixed term
- If the exchange rate weakens you may have to convert at a lower rate
- Conversion is not guaranteed upon maturity
The scenario
Our client has £2 million in on one-month notice account at 1.0% interest. At some point in the future, the client needs to convert the sterling into euro but there is no pressing requirement.
- The current EUR/GBP spot rate is 0.877
- If the client converts its deposit today, they’d get €2,280,501.71
- The client puts the £2 million in an Investec DCD for one month
- The conversion rate for the Dual Currency Deposit is set at 0.8570
The deposit earns a rate of 5.2% A.E.R. One of two things could happen:
Scenario 1: The euro/sterling rate stays above 0.857 at maturity. The client’s deposit is returned in the original currency, plus the enhanced interest in sterling of £8,547.94 (5.20% AER). That means the client gets a better yield and can maintain its deposit in GBP or convert to euro at the prevailing market rate.
Scenario 2: The euro/sterling rate drops to or below 0.857 at maturity. In this situation our client gets back its deposit in euros at the agreed conversion rate. It also gets €2,333,722.28, plus the enhanced interest in sterling of £8,547.94 (5.2% AER).
Enhance your forex strategies at Investec Ireland’s conferences and events.
Upcoming Events
Are you making numerous small foreign currency payments to your suppliers?
Call 1850 465 465 or email capitalmarkets@investec.ie to arrange access.
Further Information
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Meet the Team
Terms & Policies
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Updated General Terms and Conditions V 3 19102011.pdf
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Terms of Business
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Distance Marketing Statement
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Order Execution Policy
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Summary Conflicts of Interest Policy