Exchange Rate Guarantee
Description
To help you get the best value from your transaction and to protect you from foreign exchange fluctuations, we can offer straightforward currency options which we call our Exchange Rate Guarantee.
One of the best ways to think about an Exchange Rate Guarantee is that it is like buying an insurance policy for your currency requirement. The Exchange Rate Guarantee gives you the right but not the obligation to exchange money into another currency at a pre-agreed exchange rate on a specified date. You can elect to buy the currency in the spot market at the time of the contracts expiry if the spot exchange rate is more advantageous. A premium is payable for the right to enter an Exchange Rate Guarantee.
Example
A client importing steel from Germany needs to buy €600,000 in three months’ time to pay their supplier. The forward exchange rate for buying euro’s in three months is 1.2000, and the client does not want to get an exchange rate of less than 1.2000.
The client would purchase an exchange rate guarantee at 1.2000 for the delivery of euro’s in three months time, paying a premium of £20,000 to enter into the contract. If in three months time the exchange rate is at 1.1000, the client would simply exercise his exchange rate guarantee and buy his euro’s at 1.2000. However if in three months time the spot market is trading at 1.2600, the client would simply let the contract expire and they would buy the €600,000 in the spot market, taking advantage of the more beneficial
exchange rate.
Possible Scenarios
Scenario
Spot Rate Condition
Implication
1.
At expiry, the spot rate is worse than the guaranteed rate.
Exercise your exchange rate guarantee.
2.
At expiry, the spot rate is higher than the break even point.
Let the exchange rate guarantee lapse and buy the currency in the spot market.
3.
At expiry, the spot rate is in between the exchange rate guarantee and the break even point.
Exercise the exchange rate guarantee.
Example Trade Parameters
Amount:
€600,000
Expiry Date:
3 months
Currency Pair:
GBP/EUR
Guaranteed Rate:
1.2000
Break Even Point:
1.2500
Payable to Caxton FX:
£20,000
