Derivatives

Currency Option (Call and Put contracts)

• A Call option contract gives the holder the right, but not the obligation, to buy a commodity at a mutually agreed price (strike price) on or before a certain date (the expiration date).
• A Put option gives the holder the right, but not the obligation, to sell at the strike price, on or before the expiration date. The options are classified as either American or European Options.
• An American option may be exercised at any time before the expiration date, while a European option can only be exercised on the expiration date. The buyer of the options has to pay a price referred to as the Premium to the seller.

Interest Rate Swap (IRS)

• This transaction is a contract between two parties to exchange interest rate payments (cash flows) at a future date.
• It allows the flexibility to convert a fixed rate asset/liability to a floating rate asset/liability and vice versa. Interest rate swaps (IRS) and currency swaps are traded daily by most markets.

Forward Rate Agreement

• A contractual agreement between two parties to fix the rate of interest for a future period on a specified notional principal, such as a loan or deposit.

It is used to hedge an asset or liability, plus as an instrument for investment, trading and arbitraging.

Currency Option

• Hedges against foreign exchange rate risk arising from import or export of goods, and from foreign investments or funding in any currency.
• Protects against any unfavourable movements in foreign exchange rates while allowing you to benefit in total from favourable movements.

Interest Rate Swap

• Covers against upward and downward movement of interest rates with no premium payment up front.
• The markets are liquid in all major currencies and the notional amount, tenor and dates are all negotiable.
• No principal changes hands, therefore it minimises credit exposure.

Currency Swap

• It hedges a long-term foreign exchange risk and reduces the cost of funding a foreign subsidiary or foreign investment.
• It helps you achieve a lower domestic cost of funds by arbitraging the inefficiencies between foreign exchange and capital markets.

Forward Rate Agreement

• No principal changes hands, no margin is required, and the principal sums are not at risk.
• The risks of settlement failure are kept to a minimum.

It can be tailored to meet the needs of an institution in hedging assets or liabilities.