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;
  
• supplying wealth management applications to private banks.

Interest Rate Swap

A borrower who requires more flexibility than by applying a floating rate, could enter into an Interest Rate Swap. A swap is an agreement to exchange interest rate obligations, on a notional principle 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.

Asset Swap Rates

An Asset Swap occurs when an investor, wishing to swap a fixed coupon bond into a floating rate note, sells his bond at the current market price and simultaneously buys a floating rate note at par. Dealer hedges the floating rate obligation by entering into an offsetting swap with another counterparty.

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.

Purpose

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.

If the spot market rate or forward contract rate improves at any time up to the expiry date of the option, you can simply deal in that market and ignore the option. If your need to buy or sell the currency changes - say because an order has been unexpectedly cancelled - again, you can simply ignore the option. For example - today you are ordering raw materials from the US that you need to pay for in six months. You are therefore looking to buy dollars from us to meet the invoice. You specify that you would like to buy dollars at a worst rate of £1 = US$1.60.

Premium calculation

The cost of an option is similar to the payment of an insurance premium. It will depend upon a number of factors, including the amount and currencies involved and the period of the option. The key factors, however, are:

• The volatility of the two currencies - the greater the historic volatility between the two currencies, the higher the premium.
  
• The rate you specify you would like to deal at under the option. In principle, when you are buying dollars, you will be looking to buy as many dollars to the pound as you can. In the example quoted above, an option to buy at US$1.60 will cost more than an equivalent option to buy at a rate of US$1.59.
  
• The period of the option - a 12-month option, in principle, will be more expensive than a one-month option.

Summary

• An option is a simple product that provides protection against adverse movements in exchange rates.
• Allows you to benefit if rates move in your favour.
• You pay a premium for this flexibility.
• Allows you to protect a budget exchange rate as you choose the rate under the option.
• Provides flexibility if the currency amount is uncertain.

Key facts

• Minimum deal size: £12,500 or currency equivalent.
• Maximum deal size: No maximum.
• Period: One week to five years depending upon the currencies involved.
• Premium: Payable within two days of the deal being agreed.
  Credit line: No credit line is required for a standard currency option.
• Availability: In any currency pair where there is a liquid forward market.

Contact Us

For further information on standard currency options or other forms of options, please speak with your HSBC Bank Manager or your local relationship manager or call Customer Service on 2380 2380.