20 November 2008
The Protection Tracker- Importer
This structure provides clients with a protected worst case rate with the ability to benefit if the rate moves higher. There is no premium (upfront cost) payable for a protection tracker.
How does a protection tracker work?
For example, you import wine from Europe, and have to pay a supplier €500,000 in six months' time.
The forward rate for six months is 1.2500. You would like to benefit from favourable exchange rate moves but do not want to pay a premium for this.
The protection tracker provides protection for you to buy euros at a worst case rate of 1.2100. However, on the expiry date (two days before settlement), you are obliged to buy euros from World First at the prevailing market rate less four cents, though the rate you achieve cannot be lower than 1.2100.
Possible scenarios:
Scenario 1: GBP/EUR weakens and at maturity the exchange rate is 1.1000. You are obliged to buy euros at the protected rate of 1.2100
Scenario 2: GBP/EUR weakens and at maturity the exchange rate is 1.2400. You are obliged to buy euros at the protected rate of 1.2100
Scenario 3: GBP/EUR strengthens, and at maturity the exchange rate is 1.3600. You are obliged to buy euros at 1.3200 (1.3600 minus four cents)
Please note that this graph and any figures and terms cited are for illustrative purposes only.
Advantages
Disadvantages
The Protection Tracker- Exporter
This structure provides clients with a protected worst case rate with the ability to benefit if the rate moves lower. There is no premium (upfront cost) payable for a protection tracker.
How does a protection tracker work?
For example, you export beer to Europe and have to repatriate €500,000 in six months' time. The forward rate for six months is 1.2500. You would like to benefit from favourable exchange rate moves but do not want to pay a premium for this.
The protection tracker provides protection for you to sell euros at a worst case rate of 1.2900. However, on the expiry date (two days before settlement), you are obliged to buy euros from World First at the prevailing market rate plus four cents, though the rate you achieve cannot be higher than 1.2900.
Possible scenarios:
Scenario 1: GBP/EUR strengthens and at maturity the exchange rate is 1.4000. You are obliged to sell euros at the protected rate of 1.2900
Scenario 2: GBP/EUR strengthens and at maturity the exchange rate is 1.2800. You are obliged to sell euros at the protected rate of 1.2900
Scenario 3: GBP/EUR weakens and at maturity the exchange rate is 1.1800. You are obliged to sell euros at 1.2200 (1.1800 plus four cents)
Please note that this graph and any figures and terms cited are for illustrative purposes only.
Advantages
Disadvantages
World First Markets Limited is authorised and regulated by the Financial Services Authority. Our Firm Reference Number is 477561
