FX Hedging Products

!!

FX Forwards
"! Regular

Forward
"! Non-Deliverable Forwards (NDF)
!!

Swaps
"! FX

!!

Swaps

Currency Options
"! Plain Vanilla
!! Puts
!! Calls
FX Sales & Hedging and Financial Solutions
September 2010

FX Forwards
Locking-in FX prices for settlement at a future
date.
!! FWD rate is the FV of the Spot rate given
current spot prices and interest rates.
!! The FX FWD Rate IS NOT an FX Forecast or
Projection
!!

Two Types:
!! Regular Forward
!! Non-deliverable Forward
FX Sales & Hedging and Financial Solutions
September 2010

Regular Fwd vs. NDF

Regular Fwd
!!

!!

!!

NDF

Deal date
"! Agree on a fwd rate
Maturity
"! Actual exchange of
principal amounts.

!!

Suitable if cashflows are

readily and accurately
determinable.

!!

!!

Deal date
"! Agree on a fwd rate
Maturity
Net Settlement of cash
flows
"! Difference between preagreed FWD rate vs. Fixing
Rate
"!

!!

Suitable if cashflows are not

readily determinable
Provides cashflow and
pricing flexibility
FX Sales & Hedging and Financial Solutions
September 2010

Pricing Mechanics for FWDs &

NDFs
!! General

Formula:

"!FWD

Rate = Spot Rate + Swap Points

"!Swap

Points = Spot Rate x IRD x (tenor/360)

"!IRD

= Domestic Int. Rate Foreign Int. Rate

FX Sales & Hedging and Financial Solutions
September 2010

Pricing Mechanics for FWDs &

NDFs
!! Example:
"!Spot

Rate: 45.00
"!Php Int. Rate: 4.0%
"!USD Int. Rate: 0.25%
"!Tenor: 30 days

FX Sales & Hedging and Financial Solutions

September 2010

Pricing Mechanics for FWDs &

NDFs
!! IRD

= 4.0% - 0.25%
= 3.75%
!! Swap Points = 45.00 x 3.75% x (30/360)
= 0.141
!! FWD Rate
=
45.000 + 0.141
=
45.141
FX Sales & Hedging and Financial Solutions
September 2010

NDF Example
!! The

client wishes to hedge their USD

export proceeds by entering into a 1month
(30 day) NDF hedge to sell USD vs. Php
!! Current spot rate: 45.000
!! 1-month (30 day) NDF rate: 45.141

FX Sales & Hedging and Financial Solutions

September 2010

NDF Example (Scenario 1)

!!
!!
!!
!!
!!

Assume the Php depreciates

On the 29th day, assume USD/Php wtd. ave. exchange
rate is 48.141 (11:30am fixing rate)
Net settlement amount:
"! 45.141 48.141 = -3.0 (i.e. client pays)
Client can sell USD holdings at current market of 48.141
Net effect to client:
"! 48.141 3.0 = 45.141 hedge cost

FX Sales & Hedging and Financial Solutions

September 2010

NDF Example (Scenario 2)

!!
!!
!!
!!
!!

Assume the Php appreciates

On the 29th day, assume USD/Php wtd. ave. exchange rate
is 42.141 (11:30am fixing rate)
Net settlement amount:
"! 45.141 42.141 = +3.0 (i.e. client receives)
Client can sell USD holdings at current market of 42.141
Net effect to client:
"! 42.141 + 3.0 = 45.141 hedge cost

FX Sales & Hedging and Financial Solutions

September 2010

Added Risks
!! NDF

structures have fixing risk

compared to a plain vanilla FWD.
!! If markets are volatile and FX rates move
against the client after the fixing rate has
been determined, the client may
experience a loss

FX Sales & Hedging and Financial Solutions

September 2010

Swaps
!! What

is a Swap transaction?

"!A swap

is an agreement between two or

more parties to exchange a sequence of
cash flows over a period in the future.
"!The cash flows that the counterparties
generally exchange are tied to the value of
foreign currencies or debt instruments.

FX Sales & Hedging and Financial Solutions

September 2010

Swaps
!!

2 General Kinds of Swaps:

"! FX Swaps - exchange of one currency vs. another
with a simultaneous opposite exchange in the
future.
!!

Spot + reversing FWD

"! Interest

Rate Swaps exchange of cash flows

wherein one counterparty agrees to pay a
sequence of FIXED rate interest payments in
exchange for receiving a sequence of FLOATING
rate interest payments.
FX Sales & Hedging and Financial Solutions
September 2010

FX Swaps
!!

On Spot Date

!!

On FWD Maturity
Date
$

$
Client

SBC

Client

Php

!!

On Spot Date, the

client sells USD vs.
Php to SBC.

SBC
Php

!!

On FWD Maturity
Date, the client buys
USD vs. Php from
SBC.
FX Sales & Hedging and Financial Solutions
September 2010

FX Swap Example
#!An SME has both USD Export proceeds from
merchandise sales and USD Import requirements for raw
material importations.
#!The SME needs to convert USD250K for Php at the start
of every year and needs to buy USD250K at the end of
every year.
#!The SME can execute a 1 year S/B FX Swap in order to
bridge the cash flow gap.
#!The spot leg of the FX Swap generates Php liquidity for 1
year which can be used for OPEX and CAPEX.
#!The FWD leg of the FX Swap ensures a fixed exchange
rate in the future.
FX Sales & Hedging and Financial Solutions
September 2010

FX Options
What are FX Options?
!! An FX option gives the option buyer the right but not the
obligation to perform what is stipulated in the FX option
contract.
!! In contrast, option sellers have the obligation to perform
what is stipulated in the FX option contract if the option
buyer chooses to exercise his/her right.
!! Option Buyers pay a premium for the right to exercise on
an option contract.
!! Option Sellers receive the premium for promising to
perform what is stipulated in the option contract.
FX Sales & Hedging and Financial Solutions
September 2010

FX Options
!!

Two most basic kinds of options:

"! Call

option (right to buy the underlying asset)

"! Put option (right to sell the underlying asset)
!!

Two most basic types of options based on exercise

method:
"!

American (option buyer can exercise the option anytime during the life
of the option)

"!

European (option buyer can only exercise the option at maturity date
of the option)

FX Sales & Hedging and Financial Solutions

September 2010

FX Options
!! FX

Options

"!Call

Options:
"!Hedge against Php Depreciation
"!Provides upside protection
"!Put Options:
"!Hedge against Php Appreciation
"!Provides downside protection
FX Sales & Hedging and Financial Solutions
September 2010

Advantages of FX Options vs. FX

FWDs & NDFs
!!

!!
!!
!!

Provides Option Buyers the flexibility in FX conversions. If

exercising the option is unfavorable to the client, then they will
chose not to convert their currency. If exercising the option
proves to be beneficial for the client, then they will exercise
their right to convert their currency.
CALL OPTION BUYERS can buy FX at the pre-agreed strike
price OR at the current market WHICHEVER IS LOWER
PUT OPTION BUYERS can sell FX at the pre-agreed strike
price OR at the current market WHICHEVER IS HIGHER
Provides:
!! Full Protection
!! Flexibility
FX Sales & Hedging and Financial Solutions
September 2010

Trade Sectors / Potential Clients of

FX Options
CALL OPTION BUYERS
!! Importers
!! Clients with FCDU Loans
!! Local investors buying
foreign equities
!! Multinationals repatriating
funds abroad

!!
!!
!!
!!
!!
!!

PUT OPTION BUYERS

Exporters
Foreign investors buying
local equities
BPOs
OFWs
Shipping Companies
Manning Agencies

FX Sales & Hedging and Financial Solutions

September 2010

Client Pay-Off Profiles

Exporters / USD
Sellers
P/L

Importers / USD
Buyers
P/L

FX Rate

FX Rate

FX Sales & Hedging and Financial Solutions

September 2010

Option Pay-Offs: Hockey Sticks

Call Options
LONG

SHORT

Put Options
LONG

SHORT

FX Sales & Hedging and Financial Solutions

September 2010

FX Call Options
!!

Pay-off profile of Importers hedging by buying

Call Options

Short USD

Long CALL

Hedged Position
FX Sales & Hedging and Financial Solutions
September 2010

Call Option Example:

!! Importer

needs to Buy USD100K one month

from now.
!! Market consensus is for the Php to
strengthen (Target 44.00)
!! Current Spot Price: 45.00
!! Computed FWD Rate: 45.141
FX Sales & Hedging and Financial Solutions
September 2010

Call Option Example

!! Client

decides to hedge FX risk by buying

a 1 month ATM European CALL Option
with Strike Price at 45.141
!! Option Premium: Php45,000 (i.e. Php0.45
per 1 USD).

FX Sales & Hedging and Financial Solutions

September 2010

Call Option Example

If Php weakens 1 month later to 46.141, then the
client chooses to exercise the Call Option to buy
USD at the pre-agreed strike price of Php45.141.
!! Net effect:
!!

"! 45.141

strike price + 0.45 premium = 45.591 effective

rate
"! vs. current market rate of 46.141
"! Savings: 0.55 vs. current market rate
FX Sales & Hedging and Financial Solutions
September 2010

Call Option Example

If Php strengthens 1 month later to 44.00, then
the client will let the CALL Option expire and
proceed to buy USD at the current market price
of 44.00
!! Net Effect:
!!

"! 44.00

spot + 0.45 premium = 44.45 effective rate

"! vs. FWD Rate of 45.141
"! Savings: 0.691 vs. FWD hedge
FX Sales & Hedging and Financial Solutions
September 2010

FX Put Options
!!

Pay-off profile of Exporters hedging by buying

Put Options

Long USD

Long PUT

Hedged Position
FX Sales & Hedging and Financial Solutions
September 2010

Put Option Example:

!! Exporter

needs to sell USD100K one

month from now.
!! Market consensus is for the Php to
strengthen (Target 44.00)
!! Current Spot Price: 45.00
!! Computed FWD Rate: 45.141
FX Sales & Hedging and Financial Solutions
September 2010

Put Option Example

!! Client

decides to hedge FX risk by buying

a 1 month ATM European PUT Option with
Strike Price at 45.141
!! Option Premium: Php45,000 (i.e. Php0.45
per 1 USD).

FX Sales & Hedging and Financial Solutions

September 2010

Put Option Example

If Php weakens 1 month later to 46.141, then the
client lets the PUT Option expire and proceeds
to sell USD at the current market rate of 46.141
!! Net effect:
!!

"! 46.141

spot 0.45 premium = 45.691 effective rate

"! vs. FWD Rate of 45.141
"! Savings: 0.55 vs. FWD Hedge

FX Sales & Hedging and Financial Solutions

September 2010

Put Option Example

If Php strengthens 1 month later to 44.00, then
the client will exercise the PUT Option to sell
USD at the Strike Price of 45.141
!! Net Effect:
!!

"! 45.141

strike 0.45 premium = 44.691 effective rate

"! vs. current market rate of 44.00
"! Savings: 0.691 vs. Market Rate

FX Sales & Hedging and Financial Solutions

September 2010

What do you hedge?

!! Hedge

net economic exposure not nominal

exposure
"!Company-wide

analysis across business units

"!Examine customer/supplier contracts
!! Hedge

only what matters

"!Material

impact on the bottom line

"!Ensuring cash flows match cash needs
FX Sales & Hedging and Financial Solutions
September 2010

How do you hedge?

!! Calculate
"!Direct

total costs and benefits

Costs

!! Transactions

"!Indirect

costs, broker fees, etc.

Costs

!! Opportunity

Cost of holding margin capital

!! Forgone upside/benefits of favourable market moves
(probability; corporate view)
!! Look
!!

beyond financial hedges

Contracting Decisions

Vertical integration
!! Operating off-peak hours
!!

FX Sales & Hedging and Financial Solutions

September 2010

END
Thank You!
For further questions, please call:
SBC Hedging and Financial Solutions
888-7011 to 18
Rovic De Guzman TMU Head
Aileen Chua Head of Hedging
Robin Galang Hedging Team
Sheilagh Rivera Head of FX Sales
Francis Buenaventura FX Sales Team
FX Sales & Hedging and Financial Solutions
September 2010