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Currency Options and Risk Management

 

Have a set of currency requirements that aren’t covered by spot and forward transactions? Or do you require more flexibility with your rates without leaving your business exposed to the markets? World First’s highly trained and vastly experienced team of FX specialists can talk through your requirements and will create a bespoke suite of hedging products to manage your risk. Our team can protect your bottom line, and still allow you to benefit should rates move in your favour. If you choose not to pay a premium, the cost will be built into your exchange rate. The rate would then be lower than if you'd have paid a premium. Still, you'll be able to benefit 100% if the rates move in your favour.

There are two basic kinds – one where you pay a premium, or fee and one where you don't. Pay a premium up front and you can fix an exchange rate for a point in the future. You'll benefit up to 100% if the rates move in your favour. The higher the premium, the more flexibility and freedom you'll have. These products are offered by World First Markets and we'll advise whether they are the best option for you.

Protection option

A protection option is another form of foreign exchange hedging. Like a forward contract, it lets you set a worst case rate. But unlike a forward contract you'll pay a premium up front. This premium gives you the right rather than the obligation to buy at this worst case rate.

If the rate moves against you, you just use your worst case rate. However, if exchange rates move in your favour, you can use the improved spot rate.

Advantages

  • You get all the benefits of a forward contract
  • Guaranteed worst case rate
  • You benefit 100% if the rate moves in your favour

Disadvantages

  • Upfront premium (cost)

Risk reversal

A risk reversal is another form of currency hedging. Like a protection option, a risk reversal allows you to set a worst case rate for a fee paid up front (a premium). In addition, it lets you set a best case rate. Because you have this, the premium is less.

If the rate moves against you, you use your worst case rate. If it moves in your favour, you can take advantage of the spot rate. If the spot rate is better than your best case rate, you simply get your best case rate.

Advantages

  • Guaranteed worst case rate
  • You benefit up to the best case rate if the rate moves in your favour
  • Your premium is reduced

Disadvantages

  • You cannot benefit beyond your best case rate
  • Upfront premium (cost)

50% participating forward

With this way of hedging currency risk, you don't pay a premium, but the worst case rate you agree to will be slightly worse than a forward contract rate.

However, if the exchange rate moves in your favour, you’ll be able to benefit from 50% of any upside. The reason you don’t get 100% of the upside is that you don’t pay a premium. But you still have 100% protection if rates move against you.

Advantages

  • Guaranteed worst case rate
  • You benefit 50% when the exchange rate moves in your favour
  • No premium to pay

Disadvantages

  • Your worst case rate is worse than a forward contract

Convertible forward

There's no premium with this currency hedging option. With a convertible forward, your worst case rate is slightly worse than the forward contract rate, but you can benefit 100% if the exchange rate moves in your favour. You also have 100% protection if rates move against you.

But your agreed "best case rate" is a ceiling. If the spot rate goes through this ceiling, you revert to a forward contract at your worst case rate.

Advantages

  • Guaranteed worst case rate
  • You benefit 100% in any favourable moves up to your best case rate
  • Zero premium to pay

Disadvantages

  • Your worst case rate is worse than a forward contract
  • If the spot rate goes through your ceiling, you revert to your worst case rate

Fees and charges

We'll agree a payment fee structure with you that reflects how much business we do together. These fees can range from £0 to £15 per transaction.

And we try to help make sure all your money gets to where it needs to by covering correspondent and receiving charges where we can.