20 November 2008
The Participating Forward - Importer
The participating forward protects clients by providing a worst case rate for their full exposure, like a forward contract. However, it allows clients to 'participate' in any favourable exchange rate move for 50% of their currency exposure. There is no premium payable for a participating forward.
How does a participating forward work?
Let's assume, for example a client imports cheese from France and she has to pay a supplier €1 million in six months' time.
The forward rate for six months is 1.2300. The client would like to give herself a worst case rate but she is worried that if she enters into a forward contract, the rate might move up and she will be unable to benefit from the move. However, she does not want to pay a premium for this. We inform her that she can have a worst case rate of 1.2000 but benefit by buying half her euros at the prevailing spot rate two days before settlement if it is above 1.2000.
Possible scenarios:
Scenario 1: GBP/EUR weakens and at maturity the exchange rate is 1.1500. She buys €1 million at 1.2000
Scenario 2: GBP/EUR strengthens and at maturity, the exchange rate is 1.4000. She is obliged to buy €500,000 at 1.2000. However, the remaining €500,000 can be purchased in the spot market at 1.4000. This will give her an average rate of 1.3000
Please note that this graph and any figures and terms cited are for illustrative purposes only.
Advantages
Disadvantages
The Participating Forward - Exporter
The participating forward protects clients by providing them with a worst case rate for their full exposure, like a forward contract. However, it allows clients to participate in any favourable exchange rate move for 50% of their currency exposure. There is no premium payable for a participating forward.
How does a participating forward work?
Let's assume, for example, a client sells beer to France and forecasts that he will need to repatriate €1 million into sterling in six months' time. The forward rate for six months is 1.2300. The client would like to give himself a worst case rate but he is worried that if he enters into a forward contract, the rate might move down and he will be unable to benefit from the move. However, he does not want to pay a premium for this. We inform him that he can have a worst case rate of 1.2600 but benefit by selling half his euros at the prevailing spot rate two days before settlement if it is below 1.2600.
Possible scenarios:
Scenario 1: GBP/EUR strengthens and at maturity the exchange rate is 1.4000. The client sells €1 million at 1.2600
Scenario 2: GBP/EUR weakens and at maturity, the exchange rate is 1.1000. The client is obliged to sell €500,000 at 1.2600. However, the remaining €500,000 can be sold in the spot market at 1.1000. This will give the client an average rate of 1.1800.
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
