Professional Documents
Culture Documents
s
Risks and
Rewards
Forward Contract
This is a contract with the Bank to buy / sell a specific currency, at a pre-determined exchange rate and on an agreed future date.
A Forward contract is binding on both the parties to the contract.
Regulatory
Environment
A person resident in India may enter into a forward contract with an AD in India
FX
Options
Definition
Terminology
Notional
Call Option
: Right to Buy
Put Option
: Right to Sell
Strike
Trade date
Expiry Date
Maturity date
Case
Studies
Case - Exporter
Customer is an exporter :
46.75*
Notional :
( Jul 24th)
Strategy 1 Hedging by
using Forward Contract
The 1 month forward premia is 2 p. Hence, the forward rate will be 46.77 ( Spot
46.75 + premia 0.02)
1 month later ; possible scenarios
Scenario 1:US$ has depreciated, say to 46.50
The exporter receives 46.77 million instead of the market rate of 46.5 million.
He gains US$ 6K by entering into the forward contract
There is an option to cancel the contract before the maturity date. The prevailing premia for the
remaining tenor will need to be adjusted & the profit / loss will be credited/debited to the account
Customer sells Put @ 46.50 for $ 1.0 mio, He receives 0.20% or USD 2000
Customer sells Call @ 47.00 for 1 mio, He receives 0.45% or USD 4500
Customer receives 0.65 % or USD 6500 for this option
Scenario 1:US$ has appreciated, say to 46.90
The customer exercises the Put option @ 46.75 and gains from
46.75 to 46.60 of $3.2k. The other 2 options do not get exercised.
Risks
With the FX market open 24 Hours a day, profit target and stop loss
levels could get breached
Disclaimer
- We are pleased to present to you the proposed transaction or transactions described
herein. Although the information contained herein is believed to be reliable, we make no
representation as to the accuracy or completeness of any information contained herein or
otherwise provided by us. The ultimate decision to proceed with any transaction rests
solely with you. We are not acting as your advisor or agent. Therefore, prior to entering
into any proposed the transaction you should determine, without reliance upon us or our
affiliates, the economic risks and merits, as well as the legal, tax and accounting
characterizations and consequences of the transaction, and independently determine that
you are able to assume these risks.
- The terms set forth herein are intended for discussion purposes only and subject to the
final expression of the terms of a transaction as set forth in a definitive agreement and/or
confirmation. This proposal is neither an offer to sell nor the solicitation of an offer to
enter into a transaction. Our firm and our affiliates may act as principal or agent in similar
transactions or in transactions with respect to instruments underlying a proposed
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