ACI Examinations

  Dealing Certificate
  Operations Certificate

Tailor-made courses:

  Foreign Exchange
  Interest Rates and Money Markets
  • Currency Options
  • FRAs and Futures
  • Interest Rate Swaps
  Structured Products
  Asset & Liability Management
  Principles of Risk
  Hedging and Risk Management
  Code of Conduct

NB: these subjects can be offered individually, or in
any combination as required

Exchange rate risk management for importers
and exporters

Risk profile assessment
Advising on hedging strategies

Treasury 'health check' for banks and corporates

Staff coaching and mentoring
Training needs
Skills gaps
MIS reporting

Examples of losses caused by failure to manage
exchange rate risk

  1. 'The Gherkin'
  2. Samsung
  3. Burberry
  4. Rolls-Royce
Wayne Andrews (Managing Director)
Treasury Tutor : Derivatives

It is unfortunate that derivatives seem to have acquired the reputation of being 'risky', or even 'dangerous', in recent
years. It is also unfair, and inaccurate. It is true that there have been a number of 'rogue trader' incidents in which
irresponsible (and often poorly trained) dealers have been allowed to incur substantial losses from trading activities,
invariably against a background of management ignorance and lack of controls.

Nevertheless, if used correctly, derivatives offer a company exposed to market risks or price fluctuations an
excellent means of managing, controlling and even eliminating completely the losses associated with adverse
market movements.

Derivatives, in their simplest form, can be thought of as a type of insurance policy. Just as a firm would purchase fire
insurance which, in the event of a fire, would provide a compensation payment from an insurer to cover the cost of
repairing the damage, so a derivative can offer protection against an adverse change in market prices that affect the
firm. These might include:

   an adverse exchange rate movement (crucial for importers and exporters)

   a sudden rise in a commodity price (important for, say, construction companies)

   an unexpected increase in the price of precious metals (important for jewellery manufacturers)

A wide range of derivatives are available in each of these markets, but for illustration purposes, exchange rate
derivatives provide a useful example. Imagine a US-based importer of German cars, and consider the principal risk
he is facing: a strengthening of the currency the German firm wishes to be paid in – the euro ("EUR"). The simple
truth – that a 'stronger' currency becomes by definition more expensive to buy – is often overlooked in an
understandable but misguided belief that foreign exchange is a mysterious and complicated science understood
only by speculators and economists.

Put simply, if the EUR strengthens between the time the importer places his order, and the time he is asked to pay
for it, he will require a greater amount of his own currency (the US dollar, or "USD") to purchase the same amount of
EUR. The effect of this is simple, but stark – the importer's cost has risen even though the German manufacturer has
not increased his price at all.

One solution (though there are many) is a simple currency option; in this case, a EUR Call may be appropriate.
This gives the importer the right, but not the obligation, to purchase EUR at a pre-agreed price on or before a
specified date in the future, if it suits him to do so. A possible scenario might be:

Current EUR/USD Spot Rate: 1.35 (1.00 EUR = 1.35 USD)

Date on which the EUR purchase is required: Three months from now

Option Rate: 1.35 (this is called the "Strike Rate", and is chosen by the client)

Premium Payable: 0.02 (0.02 USD per 1 EUR)

(this is an illustration only; the premium will vary according to prevailing market conditions such as volatility, etc)

Possible Outcomes:

   The EUR rises to 1.50

      – The call gives the client the right to buy EUR at 1.35

      – He therefore exercises the option, thus enabling him to buy at a rate much cheaper than the market

   The EUR falls to 1.20

      – The client will not wish to buy at 1.35, as the current market rate (1.20) is cheaper

      – He allows the option to expire without exercising it, and simply buys the EUR in the normal market at 1.20

There is a wide range of derivatives which can be used for a variety of hedging and risk management solutions.
For a no obligation discussion about how derivatives might help your company, please e-mail us HERE.

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