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FX derivatives
Tackling currency movements against imports requires tools specially made for import businesses. Our solutions were developed with the industry in mind, to help you stay profitable through uncertain times.
Average rate option
An average rate option (ARO) is a useful tool for companies that need to make or receive regular payments in foreign currency. It provides protection against adverse movements in foreign exchange rates while also allowing the company to benefit from any movements in their favour. A premium is payable for an ARO.
To take out an ARO contract, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to buy USD.
You also need to indicate the frequency at which you make payments as this frequency will help us to decide on what basis to which we will agree to calculate the average, ie weekly/monthly.
We will then advise you of the premium you need to pay.
This product is best explained with an example.
How an ARO works
For example, you import materials from the US, and have to pay a supplier USD100,000 per month for the next year.
You are looking to hedge the next year in full and seek protection at your budgeted rate of 1.7500.
You buy an ARO that protects against the average exchange rate for the year falling below 1.7500.
At the end of every month, as the payment is due, you buy USD100,000 in the spot market as required. At maturity, the strike (1.7500) of the ARO is compared with the average rate over the year based on the Bank of England fixing it at 11 am on each fixing day (represented by the black broken line).
If the average of the 12 monthly fixings is lower than the strike (protection) rate, HSBC will, at maturity, compensate you with a cash payment equal to the difference between the strike rate and the average rate over the period on your protected amount.
If, on the other hand, the average of the 12 monthly fixings is higher than the strike rate, then by dealing in the spot market, you will have been able to benefit from favourable currency rates over the year, and you will allow the option to lapse.
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves
- Flexible, in that you can decide the strike rate and the amounts at each fixing
Disadvantages
- A premium is charged – this can be paid at any time during the life of the contract
Key facts
- Available in any currency pair where there is a liquid forward market
Currency options
A currency option provides you with the right to certain protection at a specified foreign exchange rate on a specific forward date. You are, however, under no obligation to deal at your protected rate, and you may walk away from the deal at maturity and transact in the spot market if the rate has moved in your favour. A currency option, therefore, combines the certain protection provided by a forward foreign exchange contract with the flexibility of a spot deal. A premium is payable for a plain (vanilla) currency option. Currency options are available in nearly any currency pair where there is a forward market.
To take out currency option, you need to advise us of the amount, the currencies involved, the expiry date and the exchange rate that you are looking to protect.
This product is best explained with an example.
How a currency option works
For example, you import materials from the US, and need to buy USD500,000 in six months' time to pay a supplier.
The forward rate for six months is 1.7520, and you are seeking to protect 1.7500.
HSBC sells to you a currency option providing protection at 1.7500, for which a premium is payable. However, at maturity, if the rate in the market is more favourable than 1.7500, you simply deal in the spot market.
Possible scenarios:
Scenario 1: GBP/USD weakens, and at maturity the exchange rate is 1.6800. You exercise the right to buy USD500,000 at 1.75000.
Scenario 2: GBP/USD strengthens, and at maturity the exchange rate is 1.8500. You let your currency option expire and simply buy USD500,000 at the market rate of 1.8500.
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit in full from favourable currency moves
Disadvantages
- A premium is payable
Key facts
- No credit line required
- Available in any currency pair where there is a liquid forward market
Forward extra
This structure entitles you to buy foreign currency at a specified protected 'worst-case' rate of exchange or at a more favourable rate, as far as a predetermined 'best possible' limit rate. If the limit rate is hit or exceeded at any time during the life of the trade, you are obliged to deal at the protected worst-case rate. There is no premium payable for a forward extra (FE).
To take out an FE contract, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to buy foreign currency. We will then tell you the limit rate.
This product is best explained with an example.
How an FE works
For example, you import materials from the US, and have to pay a supplier USD500,000 in six months' time.
The forward rate for six months is 1.7520. You would like to benefit from favourable exchange rate moves but are reluctant to pay a premium for this. You inform us that you are prepared to accept a worst-case rate of 1.7300. We then calculate the limit rate (which is dependent on market variables at the time) to be 1.8700.
Possible scenarios:
Scenario 1: GBP/USD weakens, and at maturity of the contract the exchange rate is 1.6900. You are entitled to buy dollars at 1.7300.
Scenario 2: GBP/USD strengthens, and trades through 1.8700 at any time during the life of the contract. You are obliged to buy dollars at 1.7300.
Scenario 3: GBP/USD strengthens, and at maturity the exchange rate is 1.8400 (1.8700 has not traded during the life of the contract). You can buy dollars in the spot market at 1.8400.
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves up to a pre-agreed limit
- No premium payable
Disadvantages
- If limit rate is hit or exceeded at any time during the life of the contract, you deal at the worst-case (protected) rate
- The protected rate will always be less favourable than the forward rate
Key facts
- A credit line is required
- Available in any currency pair where there is a liquid forward market
Forward extra plus
This structure entitles you to buy foreign currency at a specified protected 'worst-case' rate of exchange or at a more favourable rate, up to a predetermined 'best possible' limit rate. If the limit rate is hit or exceeded at any time during the life of the trade, you are obliged to deal at the original forward rate. There is no premium payable for a forward extra plus.
To take out a forward extra plus contract, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to buy your foreign currency. We will then tell you the limit rate.
This product is best explained with an example.
How a forward extra plus works
For example, you import materials from the US, and have to pay a supplier USD500,000 in six months' time.
The forward rate for six months is 1.7520. You would like to benefit from favourable exchange rate moves but are reluctant to pay a premium for this. You inform us that you are prepared to accept a worst-case rate of 1.7200. We then calculate the limit rate (which is dependent on market variables at the time) to be 1.8550.
Possible scenarios:
Scenario 1: GBP/USD weakens, and at maturity of the contract the exchange rate is 1.6900. You are entitled to buy dollars at 1.7200.
Scenario 2: GBP/USD strengthens, and trades through 1.8550 at any time during the life of the contract. You are obliged to buy dollars at 1.7520, the forward rate at the time of entering into the contract.
Scenario 3: GBP/USD strengthens, and at maturity the exchange rate is 1.8400 (1.8550 has not traded during the life of the transaction). You can buy dollars in the spot market at 1.8400.
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves up to a pre-agreed limit
- No premium payable
Disadvantages
- If limit rate is hit or exceeded at any time during the life of the trade, you deal at the original forward rate
- The protected rate will always be less favourable than the forward rate
Key facts
- A credit line is required
- Available in any currency pair where there is a liquid forward market
Participating forward
This structure provides a guaranteed protected rate for your full exposure while allowing you to benefit from a favourable exchange rate move on a predetermined portion of your currency exposure. There is no premium payable for a participating forward.
To take out a participating forward contract, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to buy your foreign currency. We will then tell you the level of participation you can benefit from.
This product is best explained with an example.
How a participating forward works
For example, you import materials from the US, and have to pay a supplier USD500,000 in six months' time.
The forward rate for six months is 1.7520. You would like to benefit from favourable exchange rate moves but are reluctant to pay a premium for this. You inform us that you are prepared to accept a worst rate of 1.7200. We then calculate the participation level to be 50 per cent.
Possible scenarios:
Scenario 1: GBP/USD weakens, and at maturity the exchange rate is 1.6900. You are entitled to buy your full USD500,000 at 1.7200.
Scenario 2: GBP/USD strengthens, and the exchange rate at maturity is 1.8200. You are obliged to buy USD250,000 at 1.7200. However, the remaining USD250,000 can be purchased in the spot market at 1.8200. This will give an average rate of 1.7700.
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves on a portion of your total exposure
- No premium payable
Disadvantages
- The protected rate will always be less favourable than the forward rate
Key facts
- A credit line is required but this is less than the equivalent forward
- Available in any currency pair where there is a liquid forward market
Tracker forward
This structure provides a hedge rate at zero premium cost with the ability to benefit from a potentially unlimited favourable exchange rate move. There is no premium payable for a tracker forward.
To take out a tracker forward, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to buy your foreign currency.
This product is best explained with an example.
How a tracker forward works
For example, you import materials from the US, and have to pay a supplier USD500,000 in six months' time.
The forward rate for six months is 1.7520. You would like to benefit from favourable exchange rate moves but are reluctant to pay a premium for this.
The tracker forward provides protection for you to buy USD at a worst-case rate of 1.7100. However, by the maturity date, you are obligated to buy USD from HSBC at the prevailing market rate less 4 cents, although the net rate cannot be worse than 1.7100.
Possible scenarios:
Scenario 1: GBP/USD weakens, and at maturity the exchange rate is 1.6800. You are obliged to deal at the protected rate of 1.7100.
Scenario 2: GBP/USD weakens, and at maturity the exchange rate is 1.7300. You are obliged to deal at the protected rate of 1.7100.
Scenario 3: GBP/USD strengthens, and at maturity the exchange rate is 1.8500. You are obliged to deal at 1.8100 (1.8500 minus 4 cents).
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves
- No premium payable
Disadvantages
- The protected rate will always be less favourable than the forward rate
Key facts
- A credit line is required
- Available in any currency pair where there is a liquid forward market
Stay focused on business by having the best FX derivatives behind your profits. Exporting is complex even without foreign currency fluctuations; our product profiles show how our tools work to protect you against volatility.
Average rate option
An average rate option (ARO) is a useful tool for companies that need to make or receive regular payments in foreign currency. It provides protection against adverse movements in foreign exchange rates while also allowing the company to benefit from any movements in their favour. A premium is payable for an ARO.
To take out an ARO contract, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to sell USD.
You will also need to indicate the frequency at which you receive payments as this frequency will help us to decide on what basis to which we will agree to calculate the average, ie weekly/monthly.
We will then advise you of the premium you need to pay.
This product is best explained with an example.
How an ARO works
For example, you export materials to the US, and receive USD100,000 per month for the next year from your customer.
You are looking to hedge the next year in full and seek protection at your budgeted rate of 1.7500.
You buy an ARO that protects against the average exchange rate for the year rising above 1.7500.
You receive the USD100,000 at the end of every month and sell them in the spot market as required. At maturity, the strike (1.7500) of the ARO is compared with the average rate over the year based on the Bank of England fixing it at 11 am on each fixing day (represented by the black broken line).
If the average of the 12 monthly fixings is higher than the strike (protection), HSBC will, at maturity, compensate you with a cash payment equal to the difference between the strike rate and the average rate over the period on your protected amount.
If, on the other hand, the average of the 12 monthly fixings is lower than the strike rate, then by dealing in the spot market, you will have been able to benefit from favourable currency rates over the year and you will allow the option to lapse.
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves
- Flexible, in that you can decide the strike rate and the amounts at each fixing
Disadvantages
- A premium is charged – this can be paid at any time during the life of the contract
Key facts
- Available in any currency pair where there is a liquid forward market
Currency options
A currency option provides you with the right to certain protection at a specified foreign exchange rate on a specific forward date. You are, however, under no obligation to deal at your protected rate, and you may walk away from the deal at maturity and transact in the spot market if the rate has moved in your favour. A currency option, therefore, combines the certain protection provided by a forward foreign exchange contract with the flexibility of a spot deal. A premium is payable for a plain (vanilla) currency option. Currency options are available in nearly any currency pair where there is a forward market.
To take out a currency option, you need to advise us of the amount, the currencies involved, the expiry date and the exchange rate that you are looking to protect.
This product is best explained with an example.
How a currency option works
For example, you export materials from the US, and need to sell USD500,000 in six months' time to pay a supplier.
The forward rate for six months is 1.7520, and you are seeking to protect 1.7500.
HSBC sells to you a currency option providing protection at 1.7500, for which a premium is payable. However, at maturity, if the rate in the market is more favourable than 1.7500, you simply deal in the spot market.
Possible scenarios:
Scenario 1: GBP/USD strengthens, and at maturity the exchange rate is 1.8500. You exercise the right to sell USD500,000 at 1.75000.
Scenario 2: GBP/USD weakens, and at maturity the exchange rate is 1.6500. You let your currency option expire and simply sell USD500,000 at the market rate of 1.6500.
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit in full from favourable currency moves
Disadvantages
- A premium is payable
Key facts
- No credit line required
- Available in any currency pair where there is a liquid forward market
Forward extra
This structure entitles you to sell foreign currency at a specified protected 'worst-case' rate of exchange or at a more favourable rate, as far as a predetermined 'best possible' limit rate. If the limit rate is hit or exceeded at any time during the life of the trade, you are obliged to deal at the protected worst-case rate. There is no premium payable for a forward extra (FE).
To take out an FE contract, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to sell your foreign currency. We will then tell you the limit rate.
This product is best explained with an example.
How an FE works
For example, you export materials to the US, and are due to receive USD500,000 in six months' time.
The forward rate for six months is 1.7520. You would like to benefit from favourable exchange rate moves but are reluctant to pay a premium for this. You inform us that you are prepared to accept a worst-case rate of 1.7750. We then calculate the limit rate (which is dependent on market variables at the time) to be 1.6300.
Possible scenarios:
Scenario 1: GBP/USD strengthens, and at maturity of the contract the exchange rate is 1.8100. You are entitled to sell dollars at 1.7750.
Scenario 2: GBP/USD weakens, and trades through 1.6300 at any time during the life of the contract. You are obliged to sell dollars at 1.7750.
Scenario 3: GBP/USD weakens, and at maturity the exchange rate is 1.6500 (1.6300 has not traded during the life of the transaction). You can sell dollars in the spot market at 1.6500.
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves up to a pre-agreed limit
- No premium payable
Disadvantages
- If limit rate is hit or exceeded at any time during the life of the contract, you deal at the worst-case (protected) rate
- The protected rate will always be less favourable than the forward rate
Key facts
- A credit line is required
- Available in any currency pair where there is a liquid forward market
Forward extra plus
This structure entitles you to sell foreign currency at a specified protected 'worst-case' rate of exchange or at a more favourable rate, as far as a predetermined 'best possible' limit rate. If the limit rate is hit or exceeded at anytime during the life of the trade, you are obliged to deal at the original forward rate. There is no premium payable for a forward extra plus.
To take out a forward extra plus contract, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to sell foreign currency. We will then tell you the limit rate.
This product is best explained with an example.
How a forward extra plus works
For example, you export materials to the US, and are due to receive USD500,000 in six months' time.
The forward rate for six months is 1.7520. You would like to benefit from favourable exchange rate moves but are reluctant to pay a premium for this. You inform us that you are prepared to accept a worst-case rate of 1.7800. We then calculate the limit rate (which is dependent on market variables at the time) to be 1.6550.
Possible scenarios:
Scenario 1: GBP/USD strengthens, and at maturity of the contract the exchange rate is 1.8100. You are entitled to sell dollars at 1.7800.
Scenario 2: GBP/USD weakens, and trades through 1.6550 at any time during the life of the contract. You are obliged to sell dollars at 1.7520.
Scenario 3: GBP/USD weakens, and at maturity the exchange rate is 1.6700 (1.6550 has not traded during the life of the contract). You can sell dollars in the market at 1.6700.
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves up to a pre-agreed limit
- No premium payable
Disadvantages
- If limit rate is hit or exceeded at any time during the life of the trade, you deal at the original forward rate
- The protected rate will always be less favourable than the forward rate
Key facts
- A credit line is required
- Available in any currency pair where there is a liquid forward market
Participating forward
This structure provides a guaranteed hedge for the full exposure while allowing you to benefit from a favourable exchange rate move on a predetermined portion of your currency exposure. There is no premium payable for a participating forward.
To take out a participating forward contract, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to sell your foreign currency. We will then tell you the level of participation you can potentially benefit from.
This product is best explained with an example.
How a participating forward works
For example, you export materials to the US, and are due to receive USD500,000 in six months' time.
The forward rate for six months is 1.7520. You would like to benefit from favourable exchange rate moves but are reluctant to pay a premium for this. You inform us that you are prepared to accept a worst rate of 1.7850. We then calculate the participation level to be 50 per cent.
Possible scenarios:
Scenario 1: GBP/USD strengthens, and at maturity the exchange rate is 1.81. You are entitled to sell USD500,000 at 1.7850.
Scenario 2: GBP/USD weakens, and the exchange rate at maturity is 1.6850. You are obliged to sell USD250,000 at 1.7850. However, the remaining USD250,000 can be sold in the spot market at 1.6850. This will give an average rate of 1.7350.
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves on a portion of your total exposure
- No premium payable
Disadvantages
- The protected rate will always be less favourable than the forward rate
Key facts
- A credit line is required but this is less than the equivalent forward
- Available in any currency pair where there is a liquid forward market
Tracker forward
This structure provides protection at a pre-agreed 'worst-case' rate with the ability to benefit from a potentially unlimited favourable exchange rate move. There is no cash premium payable for a tracker forward.
To take out a tracker forward, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to sell foreign currency.
This product is best explained with an example.
How a tracker forward works
For example, you export materials to the US, and are due to receive USD500,000 in six months' time.
The forward rate for six months is 1.7520. You would like to benefit from favourable exchange rate moves but are reluctant to pay a premium for this.
The tracker forward provides protection to sell USD at a worst-case rate of 1.7920. However, by the maturity date, you are obligated to sell USD500,000 to HSBC at the prevailing market rate, plus 4 cents, although the net rate cannot be worse than 1.7920.
Possible scenarios:
Scenario 1: GBP/USD strengthens, and at maturity the exchange rate is 1.8300. You have the right to sell dollars at the protected rate of 1.7920.
Scenario 2: GBP/USD strengthens, and at maturity the exchange rate is 1.7700. You are obliged to deal at the protected rate of 1.7920.
Scenario 3: GBP/USD weakens, and at maturity the exchange rate is 1.6600. You are obliged to deal at 1.7000 (1.6600 plus 4 cents).
Advantages
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves
- No premium payable
Disadvantages
- The protected rate will always be less favourable than the forward rate
Key facts
- A credit line is required
- Available in any currency pair where there is a liquid forward market
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Or call us on +44(0) 20 7991 5255 for more help and information.
