DCSIMG Hedging | DenizBank

FORWARD

Forward is the buy or sell of a certain amount of foreign exchange in future from a rate determined at the moment of transaction. Companies hedge currency risk with this product.

Forward is for:

  • Clients dealing in import and export
  • Companies carrying currency risk in their balance sheets
  • Clients transacting for asset management

Sample Transaction: (For importing clients)

Date of Transaction 06/01/2012
Amount 1.000.000 USD
Days to maturity 120
Maturity 05/05/2012
Spot Market Rate 1,8850 USD/TL
FORWARD Rate 1,9490 USD/TL

The company shall buy 1.000.000 USD at 1,9490 four months later in any condition.

Forward contract can be made on different currency pairs.

Sample Transaction: (For exporting clients)

Date of Transaction 06/01/2012
Maturity 04/06/2012
Amount 1.000.000 USD
Days to maturity 150
Spot Market Rate 1,8850 USD/TL
FORWARD Rate 1,9425 USD/TL

The company shall convert export fee of USD 1.000.000 into TL four months later in any condition.

Forward contract can be made on different currency pairs.

ADVANTAGES FORWARD:

The aim (purpose) of this transaction is to attain a better level than forward rate.

Sample Transaction (For buyers):

Date of Transaction 06/01/2012
Amount 1.000.000 USD
Maturity 02/04/2012
Spot Market Rate 1,8850 USD/TL
FORWARD 1,9315
Firm Price 1,9400
Advantageous Price 1,8900
Range 1,8000-1,9500
  • If the USD/TL spot rate;
    • Stays within 1,8000-1,9500 range until maturity; client buys USD 1.000.000 at 1,8900 at maturity.
    • Out of 1,8000-1,9500 band at any time; client buys USD 1.000.000 at 1,9400 at maturity.
  • Even if USD/TL does not stay within the range until maturity, the rate at which the client will buy USD (firm price: 1,9400) is very close to forward.
  • The advantageous forward provides protection for a possible upward movement of USD/TL rate.

Sample Transaction (for sellers):

Date of Transaction 06/01/2012
Amount 1.000.000 USD
Maturity 02/04/2012
Spot Market Rate 1,8850
FORWARD 1,9150
Firm Price 1,9100
Advantageous Price 2,0100
Range 1,8000-1,9500
  • If the USD/TL spot rate;
    • Stays within 1,8800-1,9500 range until maturity; client sells USD 1.000.000 on maturity at 2,0100 USD/TL.
    • Out of 1,8800-1,9500 band at any time; client sells USD 1.000.000 on maturity at 1,91000 USD/TL.
  • Even if USD/TL does not stay within the range until maturity, the rate at which our client will sell USD (firm price: 1,9100) is very close to forward.
  • The advantageous forward provides protection for a possible downward movement of USD/TL rate.

ZERO COST:

Sample Transaction (for importing clients):

Date of Transaction 06/01/2012
Amount 1.000.000 USD / 1.500.000 USD
Maturity 02/04/2012
Spot Market Rate 1,8850
FORWARD Rate 1,9190
Target Price 1,9500
Leverage *1,5
  • At maturity as of 14:00, if spot rate is below 1,9500 USD/TL, client sells USD 1.000.000 at 1,9500 USD/TL level. (By exercising put option)
  • At maturity as of 14:00, if the spot rate is below 1,9100 USD/TL, the bank exercises the put option sold by the client and sells USD 1.500.000 to the client at 1,9100 USD/TL.
  • The client buys on a better rate than forward in both cases.

ACCUMULATOR (ASYMETRICAL FORWARD):

This is the version of demand option that consists of more than one maturity. One strike is determined for all maturities and this level is a better one than the forward rate that will occur in the average maturity of the product. Thus, FX buyer clients buy FX at a lower level than average forward and FX seller clients sell FX at a higher level than average forward.

Sample Transaction: (For Importing Clients)

Date of Transaction 06/01/2012
Amount 1.000.000 USD / 1.500.000 USD
Maturity 18.01.2012
02.02.2012
17.02.2012
05.03.2012
20.03.2012
Maturity 04.04.2012
Target Price 1,9000
Spot Market Rate 1,8850
  • At fixing dates, if the spot rate is above 1,9000 USD/TL as of 14:00, the client buys 1.000.000 USD at 1,9000. (client uses call option (right to buy.).
  • At fixing dates, if the spot rate is below 1,9000 USD/TL as of 14:00, the bank exercises put option (right to sell) sold by the client and sells 1.500.000 USD at 1,9000 to the client.
  • Forward rates are as follows at fixing dates and this transaction ensures a better rate to buy USD/TL in any case.
  • Strategically, it must be preferred in the business cycle whereby it is projected that rates will not decline much (relatively the lowest).

ACCUMULATOR (ASYMETRICAL FORWARD):

Sample Transaction: (For Exporting Clients)

Date of Transaction 06/01/2012
Amount 1.000.000 USD / 1.500.000 USD(Leveraged)
Maturity 18.01.2012
02.02.2012
17.02.2012
05.03.2012
20.03.2012
Maturity 04.04.2012
Target Price 1,9250
Spot Market Rate 1,8850
  • At fixing dates, if the spot rate is below 1,9250 USD/TL as of 14:00, the client sells 1.000.000 USD at 1,9250 USD/TL. (client uses put option).
  • At fixing dates, if the spot rate is above 1,9250 USD/TL as of 14:00, the bank uses call option (right to buy) sold by the client and buys 1.500.000 USD at 1,9250 USD/TL from the client.
  • If the client had a forward transaction, she/he would have sold at the rates stated below.
  • Strategically, it must be preferred in the business cycle whereby it is projected that rates will not increase much (relatively highest).

SUPPORT FORWARD:

This is a product that enables client to trade at a single price with various maturities. The client’s profit is restricted to a certain level and it is ensured she/he realizes transactions at a better level than a simple accumulator transaction.

Sample Transaction: (For Importing Clients)

Transaction Date 06/01/2012
Amount 1.000.000 USD
Fixing Dates 18.01.2012
02.02.2012
17.02.2012
05.03.2012
20.03.2012
Maturity 04.04.2012
Target Price 1,8850
Support Level 1,9500
Spot Market Rate 1,8850

At fixings as of 14:00;

  • Purchase 1.000.0000 USD at 1,8850 if the USD/TL rate is below 1,9500;
  • If USD/TL rate is above 1,9500;
    • Client sells 1.000.000 USD at 1,9500,
    • and buys 1.000.000 USD at 1,8850.
    • Thus, Client generates an income of 1.000.000 USD* (1,9500-1,8850)=65.000 TL”.
    • Client may also realizes FX purchases from spot + 0,0650 if they request to.
Transaction Date 06/01/2012
Amount 1.000.000 USD
Fixing Dates 18.01.2012
02.02.2012
17.02.2012
05.03.2012
20.03.2012
Maturity 04.04.2012
Target Price 1,9105
Support Level 1,8000
Spot Market Rate 1,8850

LADDER FORWARD:

Sample Transaction: (For Exporting Clients)

Transaction Date 26/02/2013
Amount 500.000 USD / 1.000.000 USD
Fixing Dates 15.03.2013
15.04.2013
17.05.2013
17.06.2013
17.07.2013
16.08.2013
16.09.2013
21.10.2013
15.11.2013
16.12.2013
17.01.2014
Maturity 14.02.2014
Strike 1 1,8500
Strike 2 1,9000
Strike 3 1,9500
Spot Market Rate 1,8084

As of 14:00 at fixings;

  • If the spot rate is below 1,8500, client sells 500.000 USD at 1,8500
  • If the spot rate is between 1,8500-1,9000, client sells 500.000 USD at 1,9000
  • If the spot rate is between 1,9000-1,9500, client sells 500.000 USD at 1,9500
  • If the spot rate is above 1,9500, client sells 1.000.000 USD at 1,8500

INTEREST SWAP (IRS):

Hedging fluctuating interest rate risk

Converting floating-rate loan into fixed-rate one;

  • Hedging against increase in LIBOR or EURIBOR
  • It is the structure preferred in periods where interest rates are low and tend to increase in the upcoming periods.

Sample Transaction:

The company borrowed USD 6 months Libor indexed loan from our Bank. The company projects USD Libor may increase during loan term; realizes a swap transaction with the bank. Denizbank pays USD floating interest (USD 6-month libor) to the company and the company pays the fixed interest to the bank.

Result : The company converts its floating interest liability into a fixed structure.

Maturity 15.10.2016
Amount USD 10.000.000
Rate USD 6 month Libor + 3,10

When a company, having originally a loan structure as the one given above, requests to convert the floating interest into a fixed, the total interest rate shall be 1,20 + 3,10 = 4,30 %.

  • The company fixes the floating USD 6-month Libor to the rate of 1,20%.
  • With this transaction, no matter at which level the USD 6-month Libor is, the client shall pay to the bank fixed 1,20% ( +spread ).
  • It is applicable to medium and long-term loans (of minimum 3 years duration).

CAP: Company buys a cap, through paying a premium.

Sample Transaction:

Loan Interest 6M Libor + % 2,00
Loan Maturity 4 years
Loan Amount $10 million
Cap Rate 2,50%
Cap Premium $120.000
  • If USD 6M LIBOR > 2,50% at LIBOR fixing dates, the client uses the cap option purchased and the interest of the period would be % 2,50 + % 2,00.
  • If USD 6M LIBOR < 2,50%, the client does not use the option purchased and the loan interest of the period would remain USD 6M LIBOR + % 2,00 of the fixing date.
  • Thus the total interest rate to be paid by the client throughout maturity shall be limited to a maximum of 4,50%.

COLLAR : The client shall buy “cap” in order to hedge its floating loan, however it sells “floor” to reduce or to wipe off the cost of this transaction.

Sample Transaction:

  • A sub level (1,25%) and an upper level (4,00%) are determined range;
  • If LIBOR is higher than 4,00%, the interest that the client shall pay would be 4,00%.
  • If LIBOR is lower than 1,25%, the interest that the client shall pay would be 1,25%.
  • If LIBOR is between 1,25% and 4,00%; the client would pay whatever the LIBOR rate is in the market.

CROSS CURRENCY SWAP: To exchange interest payments and principals denominated in two different currencies for hedging floating interest rates and currency risks.(embedded in a long term loan)

Sample Transaction:

ORIGINAL FLOW
Start
Date
End
Date
Repayment
Date
Amount (TL) Principal
Repayment (TL)
Interest 
Payment (TL)
Number
of
Days
Number
of
Payments
05.04.2013 04.10.2013 04.10.2013 60,000,000 10,000,000 8,50% TL 183 1
04.10.2013 04.04.2014 04.04.2014 60,000,000 10,000,000 8,50% TL 183 2
04.04.2014 06.10.2014 06.10.2014 60,000,000 10,000,000 8,50% TL 183 3
06.10.2014 06.04.2015 06.04.2015 60,000,000 10,000,000 8,50% TL 182 4
06.04.2015 05.10.2015 05.10.2015 60,000,000 10,000,000 8,50% TL 183 5
05.10.2015 02.04.2016 02.04.2016 60,000,000 10,000,000 8,50% TL 182 6
NEW FLOW ESTABLISHED WITH CCS
Start
Date
End
Date
Repayment
Date
Amount (USD) Principal
Repayment (USD)
Interest
Payment (USD)
Number
of
Days
Number
of
Payments
05.04.2013 04.10.2013 04.10.2013 33,333,333 5,555,556 3.80% USD 183 1
04.10.2013 04.04.2014 04.04.2014 27,777,778 5,555,556 3.80% USD 183 2
04.04.2014 06.10.2014 06.10.2014 22,222,222 5,555,556 3.80% USD 183 3
06.10.2014 06.04.2015 06.04.2015 16,666,667 5,555,556 3.80% USD 182 4
06.04.2015 05.10.2015 05.10.2015 11,111,111 5,555,556 3.80% USD 183 5
05.10.2015 02.04.2016 02.04.2016 5,555,556 5,555,556 3.80% USD 182 6
  • The loan is converted into USD on spot rate 1,8000 USD/TL. By converting loan into USD, the company reduces its borrowing cost.
  • Risk: increase in USD/TL currency and the rapid decrease in USD interest rates.
  • At each repayment date, the bank pays the company 10.000.000 TL (Principal Repayment) and 8,50% TL interest, in return, the company pays the bank 5.555.556 USD (Principal Repayment) and 3,80% USD interest for each period.
  • The company reduces its cost. (While the original cost was 8,50% on TL, it becomes 3,80% USD in the new amortization table.)
  • Ideal product for companies having liabilities and incomes on different currencies.

Disclaimer:

This document was prepared by the Treasury Sales Group for informative purposes and does not put forward any investment recommendations. Figures stated in this document are only samples and do not carry any commitment. Products mentioned in this document are subject to risks at various rates. Loss of money may be incurred as a result of possible price fluctuations in the market. It must be known that transactions made in FX type carry currency risk, that depreciation may be incurred in TL/FX currency types as a result of currency fluctuations, that governments may restrict foreign capital and foreign exchange movements and bring new and/or additional taxes and that buy-sell transactions may not be performed in time. The promoted products may not be appropriate with your financial situation and risk/return preferences. Thus, giving an investment decision only based on information provided herein may not yield the results of your expectations. Our bank cannot be held liable for the results of the investment decisions taken based on these information.”

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