Risk Management Solutions

At HSBC, we know how important it is to have someone you trust to guide you through the financial solutions available. And because we understand that business is personal, your Relationship Manager will always act as a point of contact, whichever service you need. You can benefit from our global expertise and trained specialists while maintaining the vital local connection.

HSBC is recognised as one of the market leaders in foreign exchange derivatives globally. With a fully integrated worldwide trading and structuring team combined with our role as a major market maker and liquidity provider to the foreign exchange cash markets HSBC is perfectly placed to provide solutions to our varied client base.

This includes:

• providing full risk management services and flexible hedging solutions to our global corporate client base through a broad range of currency option products from vanilla options to highly tailored solutions;
• delivering trading ideas and suitable investment products to our hedge fund and other institutional investor client base.
  

Managing Interest Rate Risk

If you are borrowing money you may be concerned about rising rates. But if you are investing surplus cash, you may be more concerned about them falling. Whatever your concerns are, we can help you manage your risks appropriately.

• Fixed Rate - You can choose to ‘fix’ the interest rate on the amount of money you have borrowed so that you will know exactly how much your interest payments will be.

• Interest Rate Swaps - A swap is an agreement to exchange interest rate obligations (from floating to fixed or vice versa) on a principal amount for an agreed period. It is an exchange between two parties of interest rate exposure from floating to fixed rate or vice versa. Each thereby gains indirect access to the fixed or floating capital markets.

• Interest Rate Caps - An Interest Rate Cap is an agreement to compensate a borrower if interest rates rise above an agreed level on a ‘notional’ principal amount for an agreed period of time. It protects the holder of the cap against rising interest rates while allowing him to take advantage of the benefit of falling interest rates.

Managing Foreign Exchange Risk

If you are either:

• An importer/exporter who at any one time requires to convert from your base currency in EURO into another currency or vice versa, or
• A Company repatriating Overseas Dividends or liquidating Overseas Assets denominated in a currency other than EURO into your base currency in EURO, or
• A Company repaying Overseas Liabilities or paying Overseas Operating Expenses from your base currency in EURO into another currency.

You will be concerned about managing your foreign exchange risk since any changes in exchange rates induce changes in the value of a firm’s assets, liabilities and cash flows, especially when these are denominated in a foreign currency. Therefore, fluctuations in the currency markets have an impact on your outgoing import payments and incoming export funds. Your foreign exchange risk is influenced by many factors such as length of exposure and currency volatility. By managing this risk, you could maximize profits or minimize losses.

Where do these foreign exchange exposures come from?

• Trade – Drawdown and Repayment of Import/Export Foreign Currency Loans and payments of Import/Export Bills denominated in foreign currencies;
• Inward and Outward Remittances denominated in foreign currencies;
• Overseas Dividends, e.g. repatriating overseas profit home and Overseas Operating Expenses, e.g. paying overseas employees’ salary expenses;
• Overseas Assets, e.g. surplus cash balances of overseas subsidiaries and Overseas Liabilities, e.g. foreign currency borrowing. 

How exposed is your business?

• Estimate the total value of all your business components that are exposed to foreign exchange risk;
• Then calculate what would happen to your profitability when there are changes in the respective exchange rates;
• Also, consider the timing of your payables and receivables and estimate the potential impact of exchange rate fluctuation on your profit and loss over such time (example 30, 60 or 90 days).

What can you do to minimize the foreign exchange risks?

The following are some of the instruments you can use to minimize foreign exchange risk:

• Forward Contracts - A binding obligation to buy or sell a specific amount of currency at a predetermined rate. Settlement can be agreed on a fixed date (fixed delivery contract) or any day between two agreed dates (optional delivery contract).
  
  A forward contract provides protection, but you are obliged to deal, and at a specific rate. Therefore your company is not in a position to take advantage of favourable movements in rates between booking the contract and completing the deal; nor can you avoid your obligation should your underlying commercial exposure disappear. A currency option overcomes these weaknesses. Once you have specified the details of the option to us, and paid the premium, you know for certain the worst rate at which you will be able to buy and sell your currency.
  
• Currency Options - Currency options give the holder of the option the right but not the obligation to buy or sell a specific amount of currency, at a specific rate of exchange, on or before a specific future date. There are many different types of currency options - this fact sheet covers standard currency options as well as outlining option principles.
  
  A currency option provides a company with protection against adverse movements in foreign exchange rates. However, at the same time as providing protection, it allows a company to benefit should spot exchange rates move favorably.
  
  In simple terms it is a forward contract that can be torn up if for any reason you do not wish to buy or sell the currency under the contract. For this flexibility you will be asked to pay a premium.
  
  To take out a currency option, you specify to us the details - the amount and currencies involved, the rate at which you would like to buy or sell the currency, the expiry date and whether you would like to exercise the option only on the expiry date or at any time up to the expiry date. We will calculate the premium you will be asked to pay as a result of these factors.