Forward Transaction with Opportunity

Initial situation

  • ABC GmbH imports goods from the USA and has a need for USD in 6 months
  • Its own products are calculated with a fixed planned price
  • ABC GmbH would like to hedge against the risk of a depreciating euro or appreciating USD
  • ABC GmbH expects an appreciating EUR/USD and would like to participate

A classic FX forward already offers a 6-month maturity hedge, but there is no possibility of participation

Solution: Forward transaction with opportunity

Hedging a EUR/USD exchange rate below the comparable EUR/USD forward rate, but while retaining the flexibility to participate in rising EUR/USD rates up to a certain limit.

Indicative calculation example

(no recommended action/investment advice!):

Variant 1: Forward transaction

Variant 2: Forward transaction with opportunity

Spot rate EUR/USD: 1.2148

Hedged rate: 1.2140

Forward rate EUR/USD in 6 months: 1.2184

Rate threshold: 1.2400 (only valid on the maturity date)

- No possibility of participation

- Hedged price 44 pips lower than forward rate

+ Forward rate higher

+ Participation between EUR/USD 1.2140 – 1.2399

 

Opportunities

  • You have hedged against a falling EUR/USD exchange rate below 1.2140 USD/EUR and are therefore hedged against a negative exchange-rate development for you until 27 July 2021
  • If the exchange-rate threshold of 1.2400 USD/EUR on the maturity date is not reached, you participate in an appreciation of the EUR against the USD

Risks

  • You do not have the option of participating in an EUR/USD exchange rate at or above the exchange-rate threshold of 1.2400 USD/EUR
  • You incur further costs (bid/offer spread) if the rate threshold is not reached or exceeded on the maturity date and you subsequently have to meet your USD requirements via the spot market

The market value depends on the development of the EUR/USD spot rate, the interest difference between EUR and USD and the volatility of the EUR/USD exchange rate.

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