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The document is a Product Disclosure Statement that describes forward exchange contracts (FECs) issued by Travelex. An FEC allows parties to fix exchange rates for currency exchanges that will occur on a future date. The document explains what an FEC is, how FECs work, the costs and benefits, risks involved, and Travelex's policies regarding FEC transactions.
A forward contract locks in an exchange rate for a currency transaction that will occur at a future date. Currency futures contracts are similar to forwards but are standardized and traded on an exchange, with the exchange clearinghouse assuming default risk rather than the contract counterparties. Swaps involve an initial spot transaction combined with a forward contract to reverse the spot transaction and lock in an exchange rate to convert the currency back to the original one at the end of the period.
A forward contract is a customized agreement between two parties to buy or sell an asset at a predetermined future date and price, with no upfront payment required. It is used primarily for hedging and has counterparty risk.
A futures contract is a standardized agreement traded on a futures exchange to buy or sell an underlying asset at a predetermined future date and price, with an initial margin payment required. It is used more for speculation and has low counterparty risk due to clearing house guarantees.
The key differences are that forward contracts are customized over-the-counter agreements while futures contracts are standardized exchange-traded agreements, with futures requiring an initial margin and having a clearing house to reduce counterparty risk.
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
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Foreign exchange forward contracts allow companies to hedge currency risk by locking in an exchange rate for a future date. The key terms are the forward rate set today and the settlement date when currencies are exchanged. A forward contract can be honored, rolled over to a new date, or cancelled by taking an opposite position. According to accounting standards, any premium/discount from the forward rate is amortized over the contract period, while exchange differences are recorded in profit and loss on the settlement date.
This document discusses various currency derivatives including futures, options, and swaps. It begins with an introduction to derivatives and their uses for speculation and hedging. It then covers the basics of currency futures and forwards contracts including how futures are traded and marked to market daily. The document also discusses currency options, including the basics of calls and puts as well as how options are priced and valued based on factors like the exchange rate and time to expiration. Finally, the document defines currency swaps and provides an example of an interest rate swap where two parties agree to exchange their interest rate payment obligations to jointly lower their borrowing costs.
1) Forward-forward contracts guarantee a certain interest rate on an investment or loan that begins on a future forward date and ends later.
2) Forward rate agreements (FRAs) are similar to forward contracts where two parties agree on a borrowing rate for a future period and the difference between the agreed rate and actual rate is settled at maturity.
3) Futures contracts are agreements to buy or sell an asset at a predetermined price on a future date, with standardized terms, and can be settled through physical delivery or cash.
This document discusses forward contracts and prepaid forward contracts on stocks. It defines forward contracts and prepaid forward contracts, and describes three methods for pricing prepaid forward contracts: by analogy, by discounted present value, and by arbitrage. It also discusses how to price prepaid forwards when the underlying stock pays discrete or continuous dividends. The document explains that forward contracts allow fixing a future price without an upfront payment, and the forward price is the future value of the prepaid forward price discounted by the risk-free rate minus the dividend yield. Finally, it notes that while the forward price predicts the expected future spot price, it systematically underpredicts it due to the risk premium on the underlying stock.
Derivatives are financial instruments whose value is derived from an underlying asset. Forward and futures contracts are types of derivatives that allow parties to lock in a price today to purchase or sell an asset in the future. A forward contract is a customized over-the-counter agreement between two parties, while a futures contract is traded on an exchange with standardized terms. Both require mark-to-market adjustments and margin payments to mitigate risks from price fluctuations until contract settlement.
A forward contract locks in an exchange rate for a currency transaction that will occur at a future date. Currency futures contracts are similar to forwards but are standardized and traded on an exchange, with the exchange clearinghouse assuming default risk rather than the contract counterparties. Swaps involve an initial spot transaction combined with a forward contract to reverse the spot transaction and lock in an exchange rate to convert the currency back to the original one at the end of the period.
A forward contract is a customized agreement between two parties to buy or sell an asset at a predetermined future date and price, with no upfront payment required. It is used primarily for hedging and has counterparty risk.
A futures contract is a standardized agreement traded on a futures exchange to buy or sell an underlying asset at a predetermined future date and price, with an initial margin payment required. It is used more for speculation and has low counterparty risk due to clearing house guarantees.
The key differences are that forward contracts are customized over-the-counter agreements while futures contracts are standardized exchange-traded agreements, with futures requiring an initial margin and having a clearing house to reduce counterparty risk.
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
Subscribe to Vision Academy for Video assistance
https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
Foreign exchange forward contracts allow companies to hedge currency risk by locking in an exchange rate for a future date. The key terms are the forward rate set today and the settlement date when currencies are exchanged. A forward contract can be honored, rolled over to a new date, or cancelled by taking an opposite position. According to accounting standards, any premium/discount from the forward rate is amortized over the contract period, while exchange differences are recorded in profit and loss on the settlement date.
This document discusses various currency derivatives including futures, options, and swaps. It begins with an introduction to derivatives and their uses for speculation and hedging. It then covers the basics of currency futures and forwards contracts including how futures are traded and marked to market daily. The document also discusses currency options, including the basics of calls and puts as well as how options are priced and valued based on factors like the exchange rate and time to expiration. Finally, the document defines currency swaps and provides an example of an interest rate swap where two parties agree to exchange their interest rate payment obligations to jointly lower their borrowing costs.
1) Forward-forward contracts guarantee a certain interest rate on an investment or loan that begins on a future forward date and ends later.
2) Forward rate agreements (FRAs) are similar to forward contracts where two parties agree on a borrowing rate for a future period and the difference between the agreed rate and actual rate is settled at maturity.
3) Futures contracts are agreements to buy or sell an asset at a predetermined price on a future date, with standardized terms, and can be settled through physical delivery or cash.
This document discusses forward contracts and prepaid forward contracts on stocks. It defines forward contracts and prepaid forward contracts, and describes three methods for pricing prepaid forward contracts: by analogy, by discounted present value, and by arbitrage. It also discusses how to price prepaid forwards when the underlying stock pays discrete or continuous dividends. The document explains that forward contracts allow fixing a future price without an upfront payment, and the forward price is the future value of the prepaid forward price discounted by the risk-free rate minus the dividend yield. Finally, it notes that while the forward price predicts the expected future spot price, it systematically underpredicts it due to the risk premium on the underlying stock.
Derivatives are financial instruments whose value is derived from an underlying asset. Forward and futures contracts are types of derivatives that allow parties to lock in a price today to purchase or sell an asset in the future. A forward contract is a customized over-the-counter agreement between two parties, while a futures contract is traded on an exchange with standardized terms. Both require mark-to-market adjustments and margin payments to mitigate risks from price fluctuations until contract settlement.
Futures contracts are exchange-traded contracts that specify the quality, quantity, and delivery details of an underlying asset. They are settled daily based on changes in the spot price. Margins are deposited to minimize the risk of default. Key features of futures include daily settlement, offsetting trades to close positions before maturity, and delivery or cash settlement at expiration unless closed out earlier. Basis risk arises from uncertainty about the relationship between futures and spot prices when hedges are closed out.
1) Derivatives are financial contracts whose value is dependent on an underlying asset. Forwards and swaps are two common types of derivatives.
2) A forward contract involves an agreement between two parties to exchange an asset at a predetermined price on a future date. Swaps involve an exchange of cash flows between two parties according to a prearranged formula.
3) Common types of swaps include currency swaps, where cash flows of different currencies are exchanged, and interest rate swaps, where interest payments of fixed and floating rates are exchanged. Derivatives allow parties to hedge risks and access rates in currencies they do not have direct access to.
Futures and forward contracts lock in a price today for the purchase or sale of an asset in the future. Futures contracts are standardized and traded on exchanges, while forwards are negotiated privately. Both involve a short party committing to sell an asset and a long party committing to buy, with payment occurring at maturity. Margin requirements for futures ensure neither party defaults, as positions are marked to market daily and cash added or subtracted to offset price changes. Swaps involve exchanging cash flows, most commonly interest rate payments, with plain vanilla swaps exchanging fixed for floating rate obligations.
Derivatives are financial instruments whose value is based on an underlying asset. Common derivatives include futures, forwards, options, and swaps. Futures contracts establish an obligation to buy or sell an asset at a predetermined future date and price. Futures are traded on exchanges and involve daily cash settlement. Market participants use futures to hedge risk from price fluctuations or speculate on price movements.
The document discusses forward contracts and interest rate parity. It defines a forward contract as an agreement to deliver a specified amount of currency at a future date at a fixed exchange rate. The purpose of forwards is to hedge against exchange rate risk. Interest rate parity theory states that the forward rate should differ from the spot rate by an amount equal to the interest rate differential between two countries. Covered interest arbitrage may occur if the forward premium/discount does not equal the interest rate differential.
This document provides an overview and introduction to currency futures, options, and swaps. It defines these derivative instruments and discusses how they work. Specifically, it explains how currency futures contracts are traded and marked to market daily on an exchange. It also outlines the basics of currency options, including the types of options and how they are priced. Finally, it defines currency and interest rate swaps as agreements to exchange cash flows, and discusses why companies enter into swaps.
1) Futures contracts are agreements to buy or sell an asset at a predetermined price on a specified future date. Commodity futures involve agricultural and industrial goods, while financial futures are based on stock indexes, interest rates, and currencies.
2) Futures contracts are used by hedgers seeking to offset price risk and speculators hoping to profit from price changes. Clearinghouses associated with exchanges guarantee trades and regulate deliveries.
3) The theoretical futures price is determined by arbitrage and equals the current cash price plus the cost of carry until the futures contract expires. Basis risk and cross-hedging risk can reduce the effectiveness of hedging strategies using futures.
The document discusses the evolution and features of swap markets. It begins by defining a swap as an agreement between two counterparties to exchange cash flows in the future, with terms like payment dates, currencies, and calculation of cash flows determined by the parties. The origin of swap markets is traced back to the 1970s in response to exchange rate instability. In the 1980s, multinational corporations began using swaps as more flexible alternatives to loans. Standardized documentation helped fuel growth, and new types of swaps like interest rate and currency swaps emerged. The key features of swaps discussed are counterparties, facilitators, cash flows, documentation, benefits, termination, and default risk.
This document provides an overview of various types of financial derivatives, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is derived from an underlying security such as a commodity, stock, bond, or other derivative. The document explains the obligations associated with each type of derivative contract and discusses how they can be used for hedging risk or speculative purposes. It also outlines some key concepts for understanding derivatives markets.
The document discusses forward contracts and compares them to futures contracts. It notes that both specify a commitment to deliver an asset at a specified price, with the seller committing to deliver and the buyer committing to receive. For forwards, default risk lies with the counterparties rather than a clearinghouse. Features like standardization, tradability and liquidity differ between forwards and futures. The document also provides examples of how profits and losses are calculated for forward contracts and foreign exchange contracts.
The document discusses futures and forward contracts. It defines them as agreements between two parties where one party agrees to deliver an asset at a specified future date at a predetermined price. The key differences between futures and forwards are that futures contracts are traded on exchanges, standardized, and can be traded until maturity, while forwards are private agreements that are not standardized and typically held to delivery date. Futures allow for more liquidity and offsetting of positions compared to forwards.
Forward Rate Agreements, or FRAs, are a way for a company to lock in an interest rate today, for money the company intends to lend or borrow in the future.
A future market or future exchange is a central financial exchange where people can trade. In which Futures contracts are an agreement between a buyer and a seller to buy or sell the underlying asset at a specified price and date in the future.
The document provides an overview of derivatives markets, including the key terms and participants. It discusses how derivatives help transfer and hedge risks, facilitate price discovery, and catalyze economic activity. The main types of derivatives are forwards, futures, swaps, and options. Forwards and swaps are over-the-counter derivatives privately negotiated between parties, while futures and options are exchange-traded standardized contracts. Hedgers use derivatives to offset price risks, while speculators and arbitrageurs take positions to profit from price movements.
This document defines and compares futures contracts and forward contracts. A futures contract is a standardized agreement traded on an exchange to buy or sell an asset at a predetermined price and date. A forward contract is a private agreement between two parties for the purchase or sale of an asset at a specified future date. The document outlines the functions of hedging, speculating, and market making for futures and forward users. It provides examples of different types of futures contracts including commodities, equities, currencies, metals, and financial futures. The main differences between futures and forward contracts are that futures have no default risk, daily profit/loss settlement, and public trading, while forwards pose a default risk and profits/losses are realized at expiry through
A derivative is a financial instrument whose value is derived from the value of another asset, known as the underlying. There are three main types of traders in the derivatives market: hedgers who use derivatives to reduce risk, speculators who trade for profits, and arbitrageurs who take advantage of price discrepancies across markets. Derivatives can be traded over-the-counter (OTC) or on an exchange, and provide various economic benefits such as risk reduction and enhanced market liquidity.
This document discusses futures markets and contracts. It describes forwards and futures contracts, how they are traded over-the-counter (OTC) or on organized exchanges, and the roles of clearinghouses. Clearinghouses introduce standardization, guarantee performance on contracts, and manage risks through daily mark-to-market pricing and margin requirements. Margin deposits are adjusted daily to reflect changes in contract values and maintain minimum balances.
Foreign exchange risk and exposure refer to how changes in exchange rates can affect the value of a firm's assets, liabilities, and profits. Exposure is the sensitivity of a firm's value to exchange rate changes, while risk is the variability of a firm's value due to uncertain exchange rate changes. There are three main types of exposures - transaction, translation, and economic. Firms can use hedging strategies like forward contracts and options to manage their foreign exchange risk and exposure by locking in exchange rates for future transactions.
Covered interest arbitration allows investors to capitalize on interest rate differences between countries by using forward contracts to hedge against exchange rate risk. There are two types of interest arbitration: covered and uncovered. Covered interest arbitration uses a forward contract to hedge exchange rate risk when purchasing assets in a foreign market with a higher interest rate. The covered interest arbitration formula accounts for the domestic interest rate, foreign interest rate, current spot exchange rate, and forward exchange rate to determine if an arbitrage opportunity exists.
This document provides an overview of futures contracts. It discusses:
1. The basics of futures contracts, including that they are agreements to buy or sell an asset at a predetermined price on a specified future date.
2. How futures contracts are used for both speculation, where traders bet on price movements, and hedging, where companies protect against price changes.
3. Examples of how speculators can profit from correct bets on price increases or decreases, and how companies can hedge inventory or supply purchases by taking offsetting long or short positions in futures markets.
Futures and forwards are contracts that require deferred delivery of an underlying asset or cash settlement at a future date. A future is a standardized contract traded on an exchange, while a forward is a customized over-the-counter contract. Forwards are useful when futures do not exist for certain commodities/financials or when standard futures terms do not match needs. Forwards involve counterparty risk while futures involve clearinghouse guarantees.
There are two main categories of futures contracts: commodity futures and financial futures. Commodity futures include metals, energy, grains and oil seeds, livestock, and food and fiber. Financial futures include eurodollar futures, U.S. treasury futures, foreign government debt futures, swap futures, forex futures, single stock futures, and index futures. Commodity futures prices are influenced by factors like supply, demand, weather conditions and economic trends, while financial futures provide ways to manage risks related to interest rates, currencies, stocks, and indexes.
Futures contracts are exchange-traded contracts that specify the quality, quantity, and delivery details of an underlying asset. They are settled daily based on changes in the spot price. Margins are deposited to minimize the risk of default. Key features of futures include daily settlement, offsetting trades to close positions before maturity, and delivery or cash settlement at expiration unless closed out earlier. Basis risk arises from uncertainty about the relationship between futures and spot prices when hedges are closed out.
1) Derivatives are financial contracts whose value is dependent on an underlying asset. Forwards and swaps are two common types of derivatives.
2) A forward contract involves an agreement between two parties to exchange an asset at a predetermined price on a future date. Swaps involve an exchange of cash flows between two parties according to a prearranged formula.
3) Common types of swaps include currency swaps, where cash flows of different currencies are exchanged, and interest rate swaps, where interest payments of fixed and floating rates are exchanged. Derivatives allow parties to hedge risks and access rates in currencies they do not have direct access to.
Futures and forward contracts lock in a price today for the purchase or sale of an asset in the future. Futures contracts are standardized and traded on exchanges, while forwards are negotiated privately. Both involve a short party committing to sell an asset and a long party committing to buy, with payment occurring at maturity. Margin requirements for futures ensure neither party defaults, as positions are marked to market daily and cash added or subtracted to offset price changes. Swaps involve exchanging cash flows, most commonly interest rate payments, with plain vanilla swaps exchanging fixed for floating rate obligations.
Derivatives are financial instruments whose value is based on an underlying asset. Common derivatives include futures, forwards, options, and swaps. Futures contracts establish an obligation to buy or sell an asset at a predetermined future date and price. Futures are traded on exchanges and involve daily cash settlement. Market participants use futures to hedge risk from price fluctuations or speculate on price movements.
The document discusses forward contracts and interest rate parity. It defines a forward contract as an agreement to deliver a specified amount of currency at a future date at a fixed exchange rate. The purpose of forwards is to hedge against exchange rate risk. Interest rate parity theory states that the forward rate should differ from the spot rate by an amount equal to the interest rate differential between two countries. Covered interest arbitrage may occur if the forward premium/discount does not equal the interest rate differential.
This document provides an overview and introduction to currency futures, options, and swaps. It defines these derivative instruments and discusses how they work. Specifically, it explains how currency futures contracts are traded and marked to market daily on an exchange. It also outlines the basics of currency options, including the types of options and how they are priced. Finally, it defines currency and interest rate swaps as agreements to exchange cash flows, and discusses why companies enter into swaps.
1) Futures contracts are agreements to buy or sell an asset at a predetermined price on a specified future date. Commodity futures involve agricultural and industrial goods, while financial futures are based on stock indexes, interest rates, and currencies.
2) Futures contracts are used by hedgers seeking to offset price risk and speculators hoping to profit from price changes. Clearinghouses associated with exchanges guarantee trades and regulate deliveries.
3) The theoretical futures price is determined by arbitrage and equals the current cash price plus the cost of carry until the futures contract expires. Basis risk and cross-hedging risk can reduce the effectiveness of hedging strategies using futures.
The document discusses the evolution and features of swap markets. It begins by defining a swap as an agreement between two counterparties to exchange cash flows in the future, with terms like payment dates, currencies, and calculation of cash flows determined by the parties. The origin of swap markets is traced back to the 1970s in response to exchange rate instability. In the 1980s, multinational corporations began using swaps as more flexible alternatives to loans. Standardized documentation helped fuel growth, and new types of swaps like interest rate and currency swaps emerged. The key features of swaps discussed are counterparties, facilitators, cash flows, documentation, benefits, termination, and default risk.
This document provides an overview of various types of financial derivatives, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is derived from an underlying security such as a commodity, stock, bond, or other derivative. The document explains the obligations associated with each type of derivative contract and discusses how they can be used for hedging risk or speculative purposes. It also outlines some key concepts for understanding derivatives markets.
The document discusses forward contracts and compares them to futures contracts. It notes that both specify a commitment to deliver an asset at a specified price, with the seller committing to deliver and the buyer committing to receive. For forwards, default risk lies with the counterparties rather than a clearinghouse. Features like standardization, tradability and liquidity differ between forwards and futures. The document also provides examples of how profits and losses are calculated for forward contracts and foreign exchange contracts.
The document discusses futures and forward contracts. It defines them as agreements between two parties where one party agrees to deliver an asset at a specified future date at a predetermined price. The key differences between futures and forwards are that futures contracts are traded on exchanges, standardized, and can be traded until maturity, while forwards are private agreements that are not standardized and typically held to delivery date. Futures allow for more liquidity and offsetting of positions compared to forwards.
Forward Rate Agreements, or FRAs, are a way for a company to lock in an interest rate today, for money the company intends to lend or borrow in the future.
A future market or future exchange is a central financial exchange where people can trade. In which Futures contracts are an agreement between a buyer and a seller to buy or sell the underlying asset at a specified price and date in the future.
The document provides an overview of derivatives markets, including the key terms and participants. It discusses how derivatives help transfer and hedge risks, facilitate price discovery, and catalyze economic activity. The main types of derivatives are forwards, futures, swaps, and options. Forwards and swaps are over-the-counter derivatives privately negotiated between parties, while futures and options are exchange-traded standardized contracts. Hedgers use derivatives to offset price risks, while speculators and arbitrageurs take positions to profit from price movements.
This document defines and compares futures contracts and forward contracts. A futures contract is a standardized agreement traded on an exchange to buy or sell an asset at a predetermined price and date. A forward contract is a private agreement between two parties for the purchase or sale of an asset at a specified future date. The document outlines the functions of hedging, speculating, and market making for futures and forward users. It provides examples of different types of futures contracts including commodities, equities, currencies, metals, and financial futures. The main differences between futures and forward contracts are that futures have no default risk, daily profit/loss settlement, and public trading, while forwards pose a default risk and profits/losses are realized at expiry through
A derivative is a financial instrument whose value is derived from the value of another asset, known as the underlying. There are three main types of traders in the derivatives market: hedgers who use derivatives to reduce risk, speculators who trade for profits, and arbitrageurs who take advantage of price discrepancies across markets. Derivatives can be traded over-the-counter (OTC) or on an exchange, and provide various economic benefits such as risk reduction and enhanced market liquidity.
This document discusses futures markets and contracts. It describes forwards and futures contracts, how they are traded over-the-counter (OTC) or on organized exchanges, and the roles of clearinghouses. Clearinghouses introduce standardization, guarantee performance on contracts, and manage risks through daily mark-to-market pricing and margin requirements. Margin deposits are adjusted daily to reflect changes in contract values and maintain minimum balances.
Foreign exchange risk and exposure refer to how changes in exchange rates can affect the value of a firm's assets, liabilities, and profits. Exposure is the sensitivity of a firm's value to exchange rate changes, while risk is the variability of a firm's value due to uncertain exchange rate changes. There are three main types of exposures - transaction, translation, and economic. Firms can use hedging strategies like forward contracts and options to manage their foreign exchange risk and exposure by locking in exchange rates for future transactions.
Covered interest arbitration allows investors to capitalize on interest rate differences between countries by using forward contracts to hedge against exchange rate risk. There are two types of interest arbitration: covered and uncovered. Covered interest arbitration uses a forward contract to hedge exchange rate risk when purchasing assets in a foreign market with a higher interest rate. The covered interest arbitration formula accounts for the domestic interest rate, foreign interest rate, current spot exchange rate, and forward exchange rate to determine if an arbitrage opportunity exists.
This document provides an overview of futures contracts. It discusses:
1. The basics of futures contracts, including that they are agreements to buy or sell an asset at a predetermined price on a specified future date.
2. How futures contracts are used for both speculation, where traders bet on price movements, and hedging, where companies protect against price changes.
3. Examples of how speculators can profit from correct bets on price increases or decreases, and how companies can hedge inventory or supply purchases by taking offsetting long or short positions in futures markets.
Futures and forwards are contracts that require deferred delivery of an underlying asset or cash settlement at a future date. A future is a standardized contract traded on an exchange, while a forward is a customized over-the-counter contract. Forwards are useful when futures do not exist for certain commodities/financials or when standard futures terms do not match needs. Forwards involve counterparty risk while futures involve clearinghouse guarantees.
There are two main categories of futures contracts: commodity futures and financial futures. Commodity futures include metals, energy, grains and oil seeds, livestock, and food and fiber. Financial futures include eurodollar futures, U.S. treasury futures, foreign government debt futures, swap futures, forex futures, single stock futures, and index futures. Commodity futures prices are influenced by factors like supply, demand, weather conditions and economic trends, while financial futures provide ways to manage risks related to interest rates, currencies, stocks, and indexes.
The document discusses various types of financial derivatives including futures, forwards, options, and swaps. It explains that derivatives derive their value from underlying assets and are used to hedge risk or profit from price changes. Futures contracts are exchange-traded standardized agreements to buy or sell assets at a future date, while other derivatives like forwards and swaps are customized over-the-counter transactions.
The document discusses the derivative market in India and risk management in banks. It defines derivatives and their various types like futures, options, and swaps. It explains how derivatives help banks manage risks like credit risk, interest rate risk, and liquidity risk. The history of derivatives trading in India is also summarized dating back to 1875. Key players in the market like hedgers, speculators, and arbitrageurs are identified along with their roles.
The document summarizes the history and types of derivatives in India. It discusses:
- Futures trading began in India in 1875 through the Bombay Cotton trade association. The government later banned some derivatives until 1995-1999 when regulations were amended.
- Derivatives include futures, forwards, swaps, and options, whose values are derived from underlying assets. Common underlying assets include commodities, currencies, interest rates and stocks.
- The main purpose of derivatives is to transfer risk from one party to another through hedging. This allows farmers, for example, to guarantee prices and encourage investment.
The derivatives market worth more than $516 trillion is experiencing a period of unwinding as worried investors pull out their cash. Several banks have reported major losses in the hundreds of millions to over a billion dollars from equity and currency derivatives. The unwinding or "Great Unwind" is a result of investors selecting higher risk investments in hopes of profiting from anticipated price movements but facing extraordinary losses when prices moved against them.
Futures & Forwards Contract Derivtives In A NutshellShravan Bhumkar
Futures and forwards contracts are types of derivatives that allow parties to lock in a price for an asset to be exchanged at a future date. A forward contract is a customized over-the-counter agreement between two parties, while a futures contract is standardized and traded on an exchange. Key differences are that futures contracts have daily margin settlements and lower counterparty risk. Derivatives are used by hedgers to manage risk, speculators to wager on price movements, market-makers to facilitate trading, and arbitrageurs to exploit temporary price differences across markets.
Futures and future contracts & trading mechanism of derivatives on stock...Ameya Ranadive
The document provides an overview of futures contracts and futures trading on stock exchanges. It defines key terms like futures contracts, forwards contracts, and differences between the two. It describes the trading mechanism for derivatives, including standardized contracts, delivery dates, and margins. It also outlines order types, market participants, trading processes, and types of instruments traded on futures and options markets.
This document provides an introduction to options, including the different types (calls and puts), how they work, key terminology, and factors that influence pricing. An option gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before expiration. The buyer pays a premium to the seller for this right. Key terms discussed include strike price, expiration date, and long/short positions. Factors like time to expiration, volatility, and interest rates impact an option's price. The Black-Scholes model is commonly used to price options based on these variables.
The document discusses commodity derivatives markets and regulation. It provides background on the origins of commodity futures markets in India and the establishment of the Forward Markets Commission (FMC) in 1953 to regulate these markets. The FMC aims to ensure market integrity, protect customers, and prevent price manipulation. It oversees various commodity exchanges in India.
Futures contracts obligate the buyer and seller to exchange an asset at a predetermined price on a future date. Options provide the buyer the right, but not obligation, to buy or sell the underlying asset at a predetermined strike price by a predetermined expiration date. The buyer pays a premium for this right. There are call and put options, where calls provide the right to buy and puts provide the right to sell. Options have limited downside risk for the buyer compared to futures contracts, but also have time decay as they approach expiration.
The Forward Market Commission (FMC) regulates forward and futures markets in India. It is headquartered in Mumbai and oversees 21 exchanges. FMC was established in 1953 under the Forward Contracts Regulation Act and falls under the Ministry of Consumer Affairs. The FMC's roles include advising the government, monitoring markets, improving organization of markets, inspecting exchange accounts, and collecting/publishing market information. It has powers like summoning witnesses and requiring document production. The FMC also prescribes measures like position limits and margins to prevent speculation and defaults.
The document provides an overview of derivatives presented by group "The Trio" comprising of Neelam, Fatima, and Benish. It discusses the history and development of derivatives markets dating back to medieval times. It describes the key players in derivatives markets as hedgers, speculators, and arbitrageurs. Hedgers use derivatives to reduce risk, while speculators aim to profit from price movements. Arbitrageurs exploit temporary price differences across markets. The document also covers various types of derivatives including forwards, futures, and options contracts. It provides details on how these contracts work, their risk-return characteristics, and the current status of derivatives markets in Pakistan.
The document provides an overview of derivatives concepts, including the different types of derivatives contracts such as forwards, futures, swaps, and options. It discusses key terms like underlying assets, features of derivatives, and important concepts in options. The history of derivatives trading in India is covered, along with the regulatory framework and guidelines put forth by committees like the L.C. Gupta Committee and J.R. Verma Committee.
Want to understand how options work but don\'t have time to go through books? Read this presentation I prepared with couple of my classmates for a case study in Advanced Finance at AIM
This document provides an introduction to derivatives, including the different types. It discusses how derivatives allow companies and individuals to transfer unwanted risk to other parties. The main types of derivatives covered are options, forwards, futures, and swaps. Options give the buyer the right but not obligation to buy or sell an asset at a future date. Forwards involve an obligation to buy or sell an asset at a future date. Futures are like forwards but trade on an organized exchange. Swaps involve exchanging cash flows between two parties. Overall, the document provides a high-level overview of derivatives and their use in managing financial risk.
Used for MBA professional accounting class room presentation and it includes FASB rules and forex currency dealings details for purchase and sale of goods and services with foreign party.
1) Exchange exposure refers to the extent to which transactions, assets, and liabilities of a company are denominated in currencies other than the company's reporting currency. Transaction exposure poses more risk than translation exposure and must be carefully analyzed.
2) When importing or exporting between countries, the fluctuation in currency values presents problems. Companies must forecast currency market movements and gain insight into exchange rates to maximize the value of international transactions.
3) Risks like value at risk, forecasting errors, and gaps in exposure management systems must be considered. Companies set benchmarks like managing exposures over 6 months to help mitigate these risks. Hedging strategies using tools like forwards contracts and currency swaps are implemented to meet the benchmarks.
1. Exchange exposure refers to the extent to which transactions, assets, and liabilities of a company are denominated in currencies other than the company's reporting currency. Transaction exposure poses more risk than translation exposure and must be carefully analyzed.
2. When dealing in international trade, companies face uncertainty regarding currency fluctuations between the exporting and importing nations. They must forecast currency market movements and implement hedging strategies to maximize profits.
3. Risks like value at risk, forecasting errors, and gaps in exposure management systems must be assessed. Companies set benchmarks like managing exposures on a six month period to help evaluate performance and risks.
This document provides an overview of foreign exchange risk management. It discusses the different types of risks involved in cross-border transactions, including translation risk, transaction risk, economic risk, political risk, and interest rate risk. It then explains how derivatives like forward contracts, futures, options, currency swaps, and interest rate swaps can be used to manage currency risk and reduce the volatility of cash flows. The goal of risk management is to reduce uncertainty, lock in costs and revenues, and allow for better business and cash flow forecasting.
The document discusses foreign exchange risk and exposure. It defines foreign exchange rate, exposure, and exchange rate risk. There are three main types of exposure - transaction, translation, and economic. Transaction exposure arises from international trade obligations. Translation exposure relates to gains or losses from converting foreign subsidiary financial statements. Economic exposure is the long-term impact of exchange rate changes on a firm's cash flows. The document also discusses several international parity relationships like purchasing power parity and interest rate parity that theoretically determine exchange rates. Hedging strategies like forwards, futures, options and swaps are used to manage foreign exchange risk.
The document discusses the difference between the current rate translation method and the temporal method for foreign currency translation. It also discusses the differences between FASB Statements No. 8 and No. 52 regarding translation methods.
The key differences between the current rate method and temporal method are:
- The current rate method translates assets/liabilities at current rates and revenues/expenses at average rates, while the temporal method translates some accounts at historical rates.
- FAS 52 allows more flexibility in selecting the functional currency compared to FAS 8, but it also provides more scope for manipulation and reduces comparability between firms.
FAS 52 uses the current rate method as the basic rule for subsidiaries in low inflation
The document provides an overview of forward rate agreements (FRAs). It defines an FRA as an agreement to borrow or lend a notional amount at a fixed interest rate that takes effect at some point in the future. Only the difference between the FRA rate and the actual future rate is exchanged, with no principal exchanged. FRAs allow banks and corporations to hedge against or speculate on future interest rate movements. The document outlines the key terms and mechanics of how FRAs work, including settlement amounts, and provides an example of how an FRA could be used to hedge interest rate risk.
This document discusses hedging instruments for managing foreign exchange risk. It begins by defining foreign exchange exposure and classifying it into three categories: transaction exposure, translation exposure, and economic exposure. The document then discusses techniques for managing exposure, including forwards, futures, options, swaps, and combinations of these derivatives. It provides details on forwards contracts, interest rate swaps, currency swaps, and how premiums and discounts are calculated for forwards. The purpose is to explain common hedging instruments used to reduce foreign exchange risk.
9.kalpesh arvind shah.subject international banking and foreign exchange riskKalpesh Arvind Shah
This document discusses hedging instruments for managing foreign exchange risk. It begins by defining foreign exchange exposure and classifying it into three categories: transaction exposure, translation exposure, and economic exposure. The document then discusses techniques for managing exposure, including forwards, futures, options, swaps, and combinations. It provides details on derivatives, focusing on forwards-based derivatives like forward contracts, swaps, and futures contracts. Specific types of swaps like interest rate swaps and currency swaps are explained.
This document discusses interest rate parity theory. It begins by defining spot and forward rates. Spot rates are prices for immediate settlement, while forward rates refer to rates for future currency delivery adjusted for cost of carry. Interest rate parity theory states that interest rate differentials between currencies will be reflected in forward premiums or discounts. The theory prevents arbitrage opportunities by making returns equal whether investing domestically or abroad when measured in the home currency. The document provides an example of covered and uncovered interest rate parity. Covered parity involves hedging exchange rate risk while uncovered parity does not. Empirical evidence shows uncovered parity often fails while covered parity generally holds for major currencies over short time horizons.
DIPLOMA 2 IN BANKING AND FINANCE JAN-JUN 2017landing sonko
The document discusses foreign exchange markets and transactions. It covers:
1. The foreign exchange market facilitates the exchange of one country's currency for another's at determined rates. Transactions involve agreeing to deliver a set amount of one currency in exchange for another currency.
2. The market has two tiers - an interbank market of large transactions between banks, and a retail market of client transactions. It allows purchasing power to be transferred internationally, credit to be provided for trade, and foreign exchange risk to be minimized.
3. Common transaction types in the interbank market include spot transactions for almost immediate delivery, outright forwards for future delivery at an established rate, and swaps which involve a spot and forward transaction simultaneously
Companies face foreign exchange risks when investing internationally or conducting cross-border transactions. There are four main types of foreign exchange risks: financial risk, translational risk, transactional/commitment risk, and economic/operational risk. Companies can mitigate foreign exchange risk through natural hedging techniques, like matching foreign currency assets with liabilities, or through financial hedging instruments like forwards, swaps, and options. In India, foreign exchange gains or losses are treated differently for accounting, tax, and transfer pricing purposes. Courts have generally held that foreign exchange impacts should be considered when determining arm's length prices for transfer pricing, though safe harbor rules exclude them.
Currency risk arises from changes in currency exchange rates that can impact investment gains and losses. There are three main types of currency risk:
1. Transaction exposure is the risk from commercial transactions denominated in foreign currencies. It can be hedged using forwards, futures, options, and money market hedges.
2. Translation exposure is the risk from fluctuating exchange rates when consolidating foreign subsidiary financial statements. It does not involve real cash flows.
3. Economic exposure is the risk that currency changes impact the net present value of future cash flows. It is the most significant risk to a company's long-term viability and requires strategic planning to optimize positions amid changing economic conditions.
Although spot is settled 2 working days in the future, it is not considered in the foreign exchange market as ‘future’ or ‘forward’, but as the baseline from which all other dates (earlier or later) are considered.
An outright is an outright purchase or sale of one currency in exchange for another currency for settlement on a fixed date other than the spot value date. Rates are quoted in a similar way to those in the spot market, with the quoting bank buying the base currency on the left side and selling it on the right side. The term short date (see later in this chapter) is used for settlement on a date other than spot but less than 1 month after spot, and the term forward outright is therefore generally reserved for settlement later than that – i.e. at least one month after spot – although short dates are really only a particular range of forward outrights
The document discusses foreign exchange exposure management and reporting. It outlines the drivers of FX hedging strategy including acquisition debt denominated in USD and reliance on inter-company cash flows. It then describes the primary FX exposures as inter-company trade receivables, inter-company loans nearly all denominated in USD, and inter-company dividends nearly all non-USD, with currency exposure sitting with different entities. The FX policy aims to minimize FX risk in cross currency exposures by hedging booked and forecasted third party and inter-company exposures over variable time horizons using authorized derivatives.
This document provides an overview of fixed income securities such as bonds. It defines what a bond is, noting that a bond represents a loan where the issuer pays interest to the investor. It describes the key characteristics of bonds like the issuer, coupon rate, maturity date, and ratings. It also distinguishes bonds from equities, explaining that bonds are lower risk but provide fixed income while equities provide ownership and potential share of profits. The document outlines the major issuers of bonds and provides background on how bond markets evolved. It discusses risks associated with bonds and how bonds are valued and traded on exchanges.
This document provides an overview of foreign exchange and derivatives. It discusses key concepts like foreign exchange rates being affected by factors like balance of payments, economic growth rates, and interest rates. It also covers forex derivatives, risks in forex operations like credit risk, settlement risk and gap risk. Correspondent banking relationships and Nostro accounts are explained. Derivatives are defined as instruments that can neutralize or alter risk exposure profiles. The roles of entities like banks, money changers, and the Clearing Corporation of India in forex markets are outlined.
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2. FORWARD EXCHANGE
CONTRACTS
PRODUCT
DISCLOSURE
STATEMENT
Issue Date: 22 January 2010
Table of contents
1. Purpose page 4
2. Issuer page 4
3. What is a Foward Exchange Contract (FEC)? page 5
4. How does an FEC work? page 5
5. What is the purpose of an FEC? page 5
6. How does Travelex determine the foreign page 6
exchange rate?
7. Components and special features of an FEC page 7
8. Non-deliverable Forwards page 8
9. Costs of an FEC page 9
10. Benefits of an FEC page 10
11. Significant risks of an FEC page 10
12. Terms and Conditions and other documentation page 11
13. Credit requirements page 12
14. Instructions, confirmations and page 13
telephone conversations
15. An example of an FEC and an NDF page 14
16. Dispute resolution page 16
17. Privacy page 17
18. Taxation page 18
19. Key terms page 18
20. Updates relating to this PDS page 19
21. Contact details page 20
3
3. 1. Purpose 3. What is a Forward Exchange Contract?
This Product Disclosure Statement (PDS) contains information An FEC is a binding agreement between you and Travelex in
about Forward Exchange Contracts (FEC’s). Travelex is providing which one currency is sold or bought against another currency
you with this PDS so that you receive important information at an agreed exchange rate on an agreed date beyond two (2)
about FEC’s including their benefits, risks and costs. business days in the future.
The purpose of this PDS is to provide you with sufficient
information for you to determine whether an FEC meets your 4. How does an FEC work?
needs. This PDS will also allow you to compare the features of
other products that you may be considering. When you enter into an FEC you nominate the amount
of currency to be bought or sold, the two currencies to be
Please read this PDS carefully before purchasing this product. exchanged and the date that you wish to exchange the
In the event that you enter into an FEC you should keep a currencies (the Value Date). The currencies that you wish
copy of this PDS along with any associated documentation to exchange must be acceptable to Travelex.
for future reference.
Travelex will determine the exchange rate applicable to the
The information set out in this PDS is general in nature and has FEC based on the currencies and the Value Date that you
been prepared without taking into account your objectives, have nominated.
financial situation or needs. Before dealing in FECs you should
consider whether it is appropriate, having regard to your own With the exception of a Non-Deliverable Forward (NDF) on the
objectives, financial situation and needs. This PDS does not Value Date you are required to deliver the currency that you are
constitute financial advice or a financial recommendation. exchanging in accordance with the exchange rate determined
by Travelex and agreed by you at the time the FEC was entered
An FEC may be suitable for you if you have a reasonable level into. Upon receipt Travelex will pay you or your nominated
of understanding of foreign exchange contracts and markets. beneficiary the amount of currency that you have purchased.
If you are not confident about your understanding of
these markets, we strongly suggest you seek independent A description of how an NDF works is set out in Section 8.
advice before making a decision about this product.
If you have any questions or need more information,
please contact Travelex or refer to our website
5. What is the purpose of an FEC?
www.travelexbusiness.com/au.
FEC’s allow parties to fix exchange rates. This allows you to
hedge your currency exposure by providing protection against
2. Issuer unfavorable currency movements between the time that you
enter into an FEC and the Value Date. It may also assist you in
managing your cash flow by negating the uncertainty associated
Travelex Limited (Travelex) is the Issuer of this financial product. with exchange rate fluctuations for the certainty of a specified
This PDS has been prepared by Travelex cash flow.
ABN 36 004 179 953
AFSL Number 222444.
Further information about Travelex and the Travelex group of
companies can be found at www.travelexbusiness.com/au
4 5
4. A forward margin can be either a positive or a negative number;
6. How does Travelex determine where it is a positive number it is added to the Spot Rate and
the foreign exchange rate? where it is a negative number it is subtracted from the Spot
Rate. For example, an exporter needs to buy Australian dollars
(AUD) in three months time in exchange for US dollars (USD)
A foreign exchange rate is the price of one currency (the Base
and Australian interest rates are higher than US interest rates.
Currency) in terms of another currency (the Terms Currency).
The pricing principle assumes that Travelex buy AUD now at the
A quotation shows how many units of the Terms Currency will
Spot Rate, paying for the AUD with USD. Travelex will pass on
equal one unit of the Base Currency. For example the foreign
the benefit of the higher rate of interest that it earns on the AUD.
exchange rate AUD/USD 0.7215 means one Australian dollar is
The adjustment, which would be an addition to the Spot Rate
equal to 72.15 US cents. In this example the Australian dollar is
means that the forward exchange rate would be more favourable
the Base Currency and the US Dollar is the Terms Currency.
than a Spot Rate. The reverse would apply if Australian interest
Exchange rates are quoted on the interbank market and rates were lower than US interest rates.
fluctuate according to supply and demand. This market is
restricted to authorised exchange dealers and banks that
constantly quote to each other at wholesale rates and in 7. Components and special features
minimum parcel sizes. of an FEC
Factors that influence supply and demand include:
7.1 The term of an FEC
• Investment inflows/outflows
• Market sentiment or expectations The term of an FEC can range between three days to one year
• Economic and political influences depending on your credit terms with Travelex. A longer term
may be considered on a case-by-case basis.
• Import/export of goods and services
7.2 Other Special Features of FECs
Exchange rates quoted in the media generally refer to interbank
rates and will usually differ from exchange rates quoted to you. 7.2.1 Historical Rate Rollover Extensions
At any time up to the Value Date you may ask Travelex to extend
Travelex sets its Spot Rate by applying a margin to the Interbank
the Value Date of your FEC. Travelex refers to this as a Historical
Exchange Rate that it receives. Travelex determines this margin
Rate Rollover Extension (HRRE). All HRRE’s are subject to prior
by taking account of a number of factors, including:
approval by Travelex and may be declined at our sole discretion.
• The size of the transaction We will only approve HRRE’s where there is an underlying
• The currency pair business purpose.
• Market volatility
If Travelex agrees to extend your Value Date the exchange rate
• The time zone you choose to trade in of your FEC will be altered. The new exchange rate will reflect
• The frequency with which you trade with Travelex a number of factors including your existing FEC rate, the Spot
Rate and market interest rates. It will also reflect any funding
In determining the rate applicable to an FEC, Travelex applies implications where your FEC is either “in the money” (ITM)
a forward margin to its Spot Rate. or “out of the money” (OTM). This is determined by Travelex
comparing the value of your FEC with the prevailing market
Travelex takes into account a number of factors in determining a
Spot Rate. If the value of your FEC is greater than the prevailing
forward margin although in general terms it reflects:
market rate you will have an ITM position (and will thereby be
• he differing interest rates prevailing in the two currencies
T extending credit to us); if the value of your FEC is less than
involved in the FEC. the prevailing market rate you will have an OTM position (and
• Market volatility. Travelex will thereby be extending credit to you).
• ransaction size and Travelex’s ability to off set the
T
transaction in the inter-bank market.
6 7
5. If Travelex agrees to a HRRE we will send you a Confirmation Currency at the NDF contract rate and the notional amount of
detailing the amendment. the non-deliverable currency in the Reference Currency at the
prevailing spot exchange rate on the Fixing Date.
7.2.2 Pre-delivery of an FEC
After entering into an FEC you may wish to bring the agreed The two possible outcomes on the Value Date are:
Value Date forward. This is called pre-delivery. • f the NDF contract rate is more favorable to you than
I
the spot rate on the Fixing Date Travelex will pay you the
If Travelex agrees to the pre-delivery we will carry out a margin difference in the Reference Currency.
adjustment to the original FEC rate to reflect this earlier delivery.
• f the NDF contract rate is less favorable to you than the
I
You should note that while in normal trading conditions an spot rate on the Fixing Date you will be obligated to pay
adjustment for pre-deliveries or extensions may be somewhat Travelex the difference in the Reference Currency.
marginal, it is probable in times of extreme volatility in the foreign
Whether the NDF contract rate is more or less favorable will
exchange market that the adjustment can be significant.
depend on whether you are buying or selling the notional
It should be also be noted that in each case there is a contract amount of the non-deliverable currency.
to effect full delivery of the contract no later than the Value Date
and any agreement to effect a pre-delivery is at Travelex’s sole
discretion. 9. Costs of an FEC
7.2.3 Partial pre-delivery of an FEC
When you enter into an FEC you agree to make a physical
You may also wish to bring forward the Value Date on a portion payment of one currency to Travelex in exchange for the physical
of the amount of your FEC. If Travelex agrees to this we will carry receipt of another currency. The amount that you pay to us is
out a margin adjustment to the original FEC rate on that portion determined by the exchange rate that we agree.
of the amount that you wish to pre-deliver. The balance of the
face value of the FEC shall remain due at the original exchange You will not be charged any additional entry fees for an FEC
rate on the original Value Date. but other fees or charges may apply for related services such
as telegraphic transfers/drafts that are made in connection with
the FEC.
8. Non-Deliverable Forward (NDF) You may be charged some transaction fees upon settlement or
delivery of an FEC if this is carried out via a telegraphic transfer
A Non-Deliverable Forward (NDF) is a type of FEC that is net- or draft. Transaction fees for telegraphic transfers and drafts are
cash settled on the Value Date. This means that there is no in addition to the costs of an FEC detailed above.
exchange of currencies at settlement; instead a single amount
The level of transaction fee we charge you for these services will
will be payable by either you or Travelex.
vary based on:
NDF’s are typically used for currencies that are subject to • The size of the transaction
exchange control restrictions in their particular domestic market • The relevant currency involved
that limit access to the currency.
• How often you transact with us
When you enter into a NDF you nominate the notional amount of • The country to which the funds are being sent
the non-deliverable currency that you wish to purchase or sell,
the Reference Currency and the Value Date. Travelex will then Travelex will advise you of any transaction fees before you establish
determine the NDF contract exchange rate and the Fixing Date a trading relationship. Travelex may vary these fees from time to
(which will usually be two business days before the Value Date). time and will provide you with notice prior to doing so.
On the Value Date the amount that is payable is determined In addition to the fees charged by Travelex for sending payments
by Travelex calculating the difference in value of the notional by telegraphic/drafts transfer, any correspondent, intermediary
amount of the non-deliverable currency in the Reference or beneficiary bank(s) which facilitates the sending or payment
8 9
6. of a telegraphic/drafts transfer may impose their own additional • s counterparty to your FEC you are relying upon Travelex
A
fees or charges which may be deducted from the amount paid to be able to perform its obligations to you upon maturity of
to you or your beneficiary. the contract. As a result you have counterparty risk; you are
relying on Travelex’s financial ability to fulfill its obligations to
In relation to drafts please consult the Drafts Product Disclosure
you under the contract. To aid in your assessment of this
Statement which is available by contacting Travelex or by visiting
risk Travelex will provide you with a copy of its latest audited
our website at www.travelexbusiness.com/au.
financial statements upon request. You may request a copy of
For further information in relation to the cost of telegraphic our financial statements by emailing enquiry@travelex.com.au.
transfers/drafts in connection with an FEC, contact your
Travelex representative.
12. Terms and Conditions and
other documentation
10. Benefits of an FEC
Each FEC which you enter into will be subject to the Terms and
Benefits of an FEC include: Conditions for doing business with Travelex Limited. You are
required to sign these before entering into an FEC for the first time.
• EC’s help you manage the risk inherent in currency markets
F
In addition to our Terms and Conditions you will also need to
by predetermining the rate and date on which you will
provide us with the following signed documentation together
purchase or sell a given amount of foreign currency against
with such other “Know your Customer” information that Travelex
another currency. This can provide you with protection
may require:
against negative foreign exchange movements between the
time that you deal and the Value Date. This may also assist • Audited financial statements (no more than 12 months old)
you in managing your cash flow by negating the uncertainty • Direct Debit Request form
associated with exchange rate fluctuations for the certainty
Copies of the forms can be obtained by contacting your
of a specified cash flow.
Travelex representative.
• EC’s are flexible - Value Dates and amounts can be tailored
F
Upon completion of these documents Travelex will conduct
to meet your requirements.
an accreditation process. Accreditation and acceptance of a
customer is at Travelex’s sole discretion.
11. Significant risks of an FEC The main checks that are relevant to the accreditation of a
customer are:
Travelex considers that FEC’s are only suitable for persons who • erification of a customer’s identity in accordance with
V
understand and accept the risks involved in investing in financial relevant AML/CTF laws
products involving foreign exchange rates. Travelex recommends • successful credit check conducted through a third party
A
that you obtain independent financial and legal advice before credit agency
entering into an FEC.
• n AML risk assessment considering relevant factors such
A
The following are the significant risks associated with an FEC: as the nature of a customers business and the country
where the customer will make or receive payments
• ancellations, HRRE’s or pre-deliveries of an FEC may result
C
in a financial loss to you. Travelex will provide a quote for such • check of a customer’s principal officers and beneficial
A
services based on market conditions prevailing at the time. owners against relevant government issued sanction lists
• There is no cooling off period.
• ou are legally obligated to exchange the currency at the
Y
agreed exchange rate. As such, you will not be able to take
advantage of preferential exchange rate movements.
10 11
7. history/rating, strength of financial statements, as well as other
13. Credit requirements factors determined at Travelex’s sole discretion. Travelex may
review and amend your Trading Limit at any time.
Over the life of an FEC, as the Spot Rate moves, the contract There are two methods that may be used by us in respect of
may be In the Money (ITM) or Out of the Money (OTM) or At the your Trading Limits:
Money (ATM). That is, if the contract had to be cancelled at any
(a) Against individual contracts
time, it would result in a gain (ITM) or a loss (OTM) or breakeven
(ATM). To manage the Market Risk when an FEC is entered into, Travelex may waive the need for a cash deposit by applying the
where the potential for it to move OTM may occur, Travelex required deposit of each FEC against a Trading Limit. The FEC is
may initially secure the contract by taking an advance partial regularly revalued over the period of the FEC.
prepayment/cash deposit from you. Alternatively Travelex may (b) Against customer portfolios
apply this Market Risk against your Trading Limit.
Travelex may allocate a Trading Limit against the net position
Margin Calls of your entire portfolio of open foreign exchange contracts. We
Should an FEC contract move OTM in excess of the upfront revalue every contract in your portfolio, and if net exposures (ITM
partial prepayment or your Trading Limit Travelex will secure this and OTM) are within your Trading Limit a Margin Call will not
increased Market Risk through an Additional Partial Prepayment be triggered. However, if through revaluation the net exposure
(Margin Call). A Margin Call is required from you to bring the exceeds your Trading Limit, a Margin Call is required to take
net Market Risk exposure to zero. Margin Calls represent a your net exposure to zero.
pre-payment of the FEC by you. If a Margin Call is triggered, (Please refer to the Terms and Conditions for doing business
Travelex will advise you immediately. Payment of the Margin with Travelex Limited for further information on Credit and
Call must be made within two (2) working days of Travelex’s Authorisation limits.)
request. If you fail to pay a Margin Call Travelex may, in
its discretion choose to cancel some or all of your FEC’s.
In such circumstances you will be liable to Travelex for all 14. Instructions, confirmations and
costs associated with terminating the relevant contracts. telephone conversations
Taking a cash deposit
In the absence of a sufficient Trading Limit or no Trading Limit, The commercial terms of a particular FEC will be agreed and
you may still obtain an FEC on an advance prepayment/cash binding at the time of dealing. This may occur verbally over the
deposit basis. Generally, Travelex asks for a cash deposit for phone, electronically or in any other manner set out in the Terms
each FEC entered into. and Conditions for doing business with Travelex Limited.
The cash deposit represents an advance pre-payment of the Shortly after entering into an FEC Travelex will send you a
FEC and is taken to secure Travelex’s potential exposure resulting confirmation outlining the commercial terms of the deal; this
from adverse OTM currency movements. Your cash deposit confirmation is intended to reflect the transaction that you have
will reduce the final payment that you are required to make on entered into with Travelex. It is important that you check the
the Value Date. The initial cash deposit that we require will be confirmation to make sure that it accurately records the terms
determined as a percentage of the value of the FEC or FEC’s of the transaction and sign and return a copy to Travelex. You
that you have entered. Travelex may determine this percentage should note however that there is no cooling-off period with
at its discretion based on a number of factors including the value respect to an FEC and that you will be bound once your original
of your outstanding FEC’s, Your current financial position/credit instruction has been accepted by Travelex regardless of whether
rating and the prevailing market conditions. you sign or acknowledge a confirmation. In the event that there
is a discrepancy between your understanding of the FEC and
Trading Limits the confirmation it is important that you raise this with Travelex
Travelex may choose to waive the requirement of a cash deposit as a matter of urgency.
by applying the required amount (or notional deposit) against a
Trading Limit. The Trading Limit is dependant upon your credit
12 13
8. Conversations with our dealing room are recorded in accordance Again, assume the current spot exchange rate is 0.6500. The
with standard market practice. We do this to ensure that 3 month forward margin is -USD0.0130 which when applied to
we have complete records of the details of all transactions. the current spot exchange rate, results in a 3 month forward
Recorded conversations are retained for a limited time and are exchange rate of 0.6370.
usually used when there is a dispute and for staff monitoring
purposes. If you do not wish to be recorded you will need to In 3 months time you will buy from Travelex the USD100,000
inform your Travelex representative. However, Travelex will at the forward exchange rate of 0.6370 and you will pay AUD
not enter into any transaction over the telephone unless the 156,985.87.
conversation is recorded. In summary, the importer is better off if the prevailing spot
exchange rate is less than the FEC rate of 0.6370 on the
maturity date. However, if the prevailing spot exchange rate
15. Example of an FEC and an NDF on the maturity date is greater than the FEC rate of 0.6370 the
importer would be worse off as the amount of AUD paid will be
The examples below are for information purposes only and more than the amount of AUD payable if the importer had not
use rates and figures that we have selected to demonstrate entered into an FEC.
how an FEC and NDF work. In order to assess the merits of 15.2 NDF
any particular FEC or NDF you should use the actual rates and
An Australian company is exporting goods to China. The
figures quoted at the relevant time.
company invoices its customer in Chinese Renminbi (CNY)
15.1 FEC but the customer pays in AUD. The latest invoice requires the
An Australian importer needs to pay USD100,000 in 3 months customer to pay the AUD equivalent of CNY650,000 in three
time for goods purchased overseas. The importer can buy months time. Assume the current AUD/CNY spot exchange rate
the USD in 3 months time but then it cannot budget the right is 6.35.
amount of AUD because the exchange rate in 3 months time What would happen if the position was not hedged?
is unknown. Assume that the current AUD/USD spot exchange
If the exporter did nothing the amount of AUD that it receives
rate is 0.6500.
in three months time will depend on the prevailing AUD/CNY
What would happen if the position was not hedged? exchange rate.
If the importer did nothing, the amount of AUD needed to pay in
If the AUD goes up (appreciates) the CNY will be less valuable
3 months time for the USD100,000 will depend on the prevailing
and the exporter will receive less AUD. For instance if the
exchange rate quoted for the value at that time.
AUD/CNY exchange rate rises to 6.75 the importer will
If the AUD/USD exchange rate went up (the AUD appreciates), receive $96,296.27.
less AUD will be required when it comes time to pay for the
If the AUD goes down (depreciates) the CNY will be more
USD. Assume the exchange rate rises to 0.6600 the importer
valuable and the exporter will receive more AUD. For instance
will pay AUD 151,515.15.
if the AUD/CNY exchange rate falls to 5.95 the importer will
If the AUS/USD exchange rate goes down (AUD depreciates), receive $109,243.68.
more AUD will be required. Assume that the rate falls to 0.6200,
How can an NDF change this?
then the Importer would pay AUD161,290.32.
The exporter can eliminate its exposure to the AUD appreciating
How can the FEC change this? by entering into a NDF with a Value Date in three months time.
The importer can eliminate its exposure to the exchange rate
Assume that the prevailing forward margin is 0.01 and Travelex
depreciating by entering into an FEC. This will allow an exchange
offers an NDF contract rate of 6.4135.
rate to be fixed for their purchase of USD100,000 in three
months time. This guaranteed future exchange rate is called the The exporter can then enter into an NDF for a notional amount
forward exchange rate. of CNY 650,000 with a Value Date of three months and a Fixing
Date two days prior to the Value Date.
14 15
9. The possible outcomes on maturity are as follows: who will refer the matter to senior management for resolution.
• f the AUD/CNY exchange rate has appreciated above the
I All complaints are logged at each stage of the process.
NDF contract rate Travelex will pay the cash difference
If you have any enquiries about our dispute resolution process,
in AUD (the Reference Currency in this example) to the
please contact the compliance manager at the principal
exporter on the Value Date.
business address listed below, call 1300 732 561 or email us at
For example if the spot rate on the Fixing Date is 6.75 the dispute@travelex.com.au.
fixing amount will be AU$96,296.27 (CNY650,000 / 6.75), If you are dissatisfied with the resolution of a complaint you have
the contract settlement amount will be AU$101,348.71 the right to refer the complaint to:
(CNY650,000 / 6.4135) and the difference of AU$5,052.44
will be payable to the exporter by Travelex. Financial Ombudsman Service (FOS)
GPO Box 3
This cash settlement amount will compensate the exporter Melbourne, Victoria 3001
for the lower amount of AUD that it will receive from its Toll Free Number: 1300 78 08 08
customer in China as a result of the higher AUD/CNY www.fos.org.au
exchange rate.
FOS operate an independent dispute resolution scheme.
• f the AUD/CNY exchange rate has depreciated below the
I
NDF contract rate the exporter will be obligated to pay the
cash difference in AUD to Travelex.
17. Privacy
For example if the spot rate on the Fixing Date is 5.95 the
fixing amount will be AU$109,243.68 (CNY650,000 / 5.95), In the course of providing foreign exchange services we may
the contract settlement amount will be AU$101,348.71 collect information about you. The information that we obtain
(CNY650,000 / 6.4135) and the difference of AU$7,894.97 will from you or other people is for the purpose of processing your
be payable to Travelex by the exporter. foreign exchange transactions. Certain of this information may
be required by us in order to comply with laws and regulations,
This settlement amount will reduce the benefit that the exporter
including anti-money laundering laws.
would have received from the lower AUD/CNY rate. The
exporters’ customer will pay the exporter AU$109,243.68 We may use your information to send you details about Travelex
and the exporter will pay Travelex AU$7,894.97. The total of products. If you do not wish to receive such information please
AU$101,348.71 retained by the exporter is equivalent to the let us know. We may also disclose information about you to third
contracted NDF exchange rate of 6.4135 party service providers (such as credit checking agencies) who
assist us in our business operations and service provision.
Entering into the NDF has fixed the exporters effective exchange
rate at 6.4135 and removed the uncertainty of fluctuations in the Travelex is committed to complying with all privacy laws
AUD/CNY exchange rate. and regulations. Further information about Travelex’s privacy
practices can be found at www.travelexbusiness.com/au.
If you would like further information about the way that Travelex
16. Dispute resolution
manages the handling of personal information, please contact
our privacy officer:
You should address any complaint relating to the product
described in this PDS to your Travelex representative in the • Email: privacy@travelex.com.au
first instance. • ail: Attention Privacy Officer,
M
Level 12, 1 Margaret Street, Sydney NSW 2000
If your complaint is unable to be resolved the matter will be
automatically escalated to the relevant business unit manager. • Call: 1800 036 739
If a resolution is not reached within a reasonable time period, the
matter will be further escalated to Travelex’s compliance manager
16 17
10. Settlement Risk means the risk that a counter party will be
18. Taxation unable to fulfil its obligations on the Value Date.
Spot Rate means the exchange rate for settlement on a
Taxation law is complex and its application will depend on a Value Date of up to two (2) business days from the date the
person’s individual circumstances. When determining whether or transaction was entered. (is this consistent with FEC rate see
not these products are suitable you should consider the impact Clause 2 where we state 2 days and beyond?)
it will have on your own taxation position and seek professional
advice on the tax implications it may have for you. Term Currency has the meaning set forth in section 6.
Trading Limit means the provision of credit terms to you to
cover the exposure emanating from the Settlement Risk.
19. Key Terms
USD means United States Dollar.
Additional Partial Prepayment/Margin Call has the meaning Value Date has the meaning set forth in section 4.
set forth in section 13.
‘We/we, Our/our, Us/us’ means Travelex Limited
AUD means Australian Dollar. ABN 36 004 179 953.
You/you, Your/your’ means the Customer.
Base Currency has the meaning set forth in section 6.
Confirmation means written or electronic advice from Travelex
that sets out the commercial details of an FEC. 20. Updates relating to this PDS
Customer means the entity that signs Travelex’s Terms and
Conditions for doing business with Travelex Limited. The information in this PDS is subject to change. Travelex will
issue a supplementary or replacement PDS where new information
Fixing Date means the date specified by Travelex for arises that is materially adverse to the information in this PDS.
determining the spot rate applicable to the settlement of a NDF.
Where new information arises that is not materially adverse to the
Hedge means activity initiated in order to mitigate or reduce information in this PDS Travelex will post such updated information
economic exposure to adverse price or currency movements, by on its website at www.travelexbusiness.com/au. You may request
taking a related offsetting or mitigating position, such as an FEC. a copy of this information from your Travelex representative or by
Historical Rate Rollover Extension has the meaning set forth contacting Travelex on 1300 732 561.
in section 7.2.1
Interbank Exchange Rate means the wholesale Spot Rate that
Travelex receives from the foreign exchange interbank market.
Issuer has the meaning of s 761E of the Corporations
Act 2001. (Cth)
Market Risk means the risk of adverse movements in the value
of a transaction due to movements in the Spot Rate over time.
PDS means Product Disclosure Statement.
Reference Currency means the nominated settlement currency
for a NDF.
18 19
11. 21. Contact details
General enquiries
1300 732 561
www.travelexbusiness.com/au
New South Wales
Level 12, 1 Margaret Street
Sydney NSW 2000
Tel. +61 (0)2 8585 7000
Fax. +61 (0)2 8244 8350
Victoria
Level 8, 565 Bourke Street
OCBC House
Melbourne VIC 3000
Tel. +61 (0)3 9282 0333
Fax. +61 (0)3 9282 0308
Western Australia
Level 19, St Martins Tower,
44 St Georges Terrace,
Perth WA 6000
Tel. +61 (0)8 9481 0909
Fax. +61 (0)8 9321 2758
Auckland
Level 14 Brookfields House
19 Victoria St, Auckland, NZ
Tel. +64 (0)9 359 5200
Fax. +64 (0)9 359 5120
www.travelexbusiness.com/nz
0110
ABN 36 004 179 953
AFSL 222444