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Partnering with
Global Markets

A potential foreign exchange need has been identified.

You engage a Global Markets Specialist to assist with Ann’s requirements.

Client requirements

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The Global Markets Specialist was able to identify the hedging requirements of Russell’s Recycling and recommend to the Relationship Executive the FX limits that are potentially required to allow the client to implement a solution.

The Relationship Executive submits a CommSee Commercial Lending (CCL) application to be assessed through their appropriate Risk channel.

Any documentation that needs to be prepared and signed prior to implementing the hedge was also discussed.

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Exchange rate movements

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Once all the limits and documentation were completed, the Global Markets Specialist was ready to implement a FX risk management solution for the client.

The client was interested in the market, and kept up to date with exchange rate movements, but was more concerned in managing the Foreign Exchange risk.

They realised that an appreciation in the AUD/EUR would result in import cost savings, but a depreciation in the AUD/EUR could be costly for Russell’s Recycling if a hedging solution was not implemented.

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Forward exchange contracts

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Russell’s Recycling’s main focus was to limit the downside risks to ensure the budget rate was not compromised.

Russell’s Recycling could achieve their budget rate so they decided to execute a series of Forward exchange contracts to pay a total of EUR 5,070,000 at the required future dates, at an average forward rate of 0.6890.

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Forward exchange contracts

A forward exchange contract provides for the purchase or sale of one currency against another, where an exchange rate is agreed today for the physical delivery at a date (settlement date) that is greater than two business days.

They are also known as Foreign Exchange contracts and some of the benefits are that it provides cash flow certainty as you receive exchange rate protection from adverse movements in the exchange rate and you pay no premium.

You cannot benefit from future favourable exchange rate movements and you may incur a cost if the transaction is terminated before the settlement date.

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Client solution

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The client chose a solution where they were able to lock in their future AUD cost at an average rate of 0.6890, which meant their equipment cost AUD 7,358,490.57, which was approximately $20,500 less than what they originally budgeted for, and they could concentrate on running their recycling business rather than worry about the cost of their equipment purchase.

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