Investment Banking

Overview

Any individual or company engaged in overseas business should be aware of the risks of currency fluctuations. Customers without commercial contracts expressed in domestic currency (or fixed by an agreed rate of exchange) are fully exposed to what is known as an exchange risk. Exchange risk may arise because of exchange rate movements in the period from the original commercial contract, to the time of settlement of the domestic equivalent of the foreign currency amount. At ANZ, we can help you manage exchange risk with a range of foreign exchange products.

Forward Exchange Contracts

A Forward Exchange Contract is a contract between two parties (the Bank and the customer). One party contracts to sell and the other party contracts to buy, one currency for another, at an agreed future date, at a rate of exchange which is fixed at the time the contract is entered into.

Features/benefits

• Contracts can be arranged to either buy or sell a foreign currency against your domestic currency, or against another foreign currency.
• available in all major currencies
• available for any purpose such as trade, investment or other current commitments.

Forward exchange contracts must be completed by the customer. A customer requiring more flexibility may wish to consider Foreign Currency Options.

Foreign Currency Options

Foreign Currency Options can provide a fixed exchange rate for a future date if rates move adversely, but also provide the added flexibility of being able to use the prevailing spot rate if rates have moved favourably.

If you buy a foreign currency option, you get the right to choose, on an agreed future date, whether you want to exercise the option and transact at the option’s exchange rate or not. If the spot rate is more favourable than the option’s exchange rate, then you will choose to transact at the spot rate. However, if the spot rate is less favourable you will use the option.

For this right to choose, you will pay a premium at the outset (as you would for insurance). Options give you more flexibility in selecting the exchange rate you want to cover at. However, the more favourable the exchange rate you select, the higher the premium cost will be.

Options can also be used to hedge uncertain exposures. The maximum cost will be the premium amount paid for the option. Options can be structured in many ways to assist you in the management of your foreign exchange exposures.

Flexible Forwards

ANZ provides a range of foreign exchange management products offering customers diverse and flexible hedging solutions to known exposures.

These products are known collectively as flexible forwards and include:

• Collar
• Converting Forward
• Smart Forward
• Smart Forward Plus
• Deferred Premium Option
• Knock-Out Forward
• Others – eg Bonus Forwards, Layered Forwards, Binary Options (Digital)

Flexible forwards contain in-built strategies for hedging foreign exchange risk and each have particular advantages and disadvantages associated with their use.

The products chosen by the customer would be expected to reflect a combination of the customer’s attitude to risk, overall exposure management objectives and broad view on the future movements of the foreign exchange market.

Please contact Global Foreign Exchange or your Relationship Manager for further information.