Table of Contents
1. Purpose and Your Counterparty
2. Risk Disclosure
3. Deliverable Forwards
4. Non-Deliverable Forwards
5. What are Options?
6. Significant Benefits and Significant Risks of Options
7. Vanilla Option
8. The Participating Forward
9. The Forward Extra
10. The Leveraged Forward Extra
11. The Range Forward
12. The Leveraged Range Forward
13. The Leveraged Forward
14. Margin Calls
15. Costs and Charges
16. Glossary
1. Purpose
This Product Statement and Risk Disclosure provides you with a detailed description of the types, forms and features of the products provided by Ebury Partners Markets Ltd ("EPM") and the associated costs, terms and risks.
This document outlines the necessary information to inform potential EPM clients about EPM services. This document is further designed to provide you with a non-exhaustive list of risk associated with derivative product trading and other significant aspects of such products.
You should not deal in derivatives unless you understand the nature of the contract you are entering into and its associated risks. You should also be satisfied that the contract is appropriate for you in the light of your circumstances and financial position.
The products offered to clients by EPM are Over the Counter ("OTC") derivative contracts specifically:
- Vanilla Options
- The Participating Forward
- The Forward Extra
- The Leveraged Forward Extra
- The Range Forward
- The Leveraged Range Forward
- The Leveraged Forward
- Non Deliverable Forwards
- Forwards
EPM is licenced to provide these OTC, MIFID II regulated products by licence from the Financial Conduct Authority.
The Markets in Financial Instruments Directive (Onshored EU Directive 2014/65/EU active from 2017) ("MiFID II") is a Directive intended to regulate the activities of firms providing services relating to financial instruments. Certain hedging products offered by Ebury fall under the scope of MiFID II, meaning they must be treated as investment products and managed accordingly.
Whilst derivative instruments can be utilised for the management of risk, some investments may not be appropriate for some investors. Different instruments involve different levels of exposure to risk and in deciding whether to trade in such instruments, you should be aware that you could possibly be exposed to the following (non-exhaustive list) of risks associated with EPM Products:
- Counterparty Risk
- Liquidity RIsk
- Foreign Markets and Currency Risk
- Volatility Risk
- Market Risk
- Force Majeure
- Collateral Risk
- Margin at Risk
We recommend that you read this Product and Risk Disclosure in full before deciding to access an EPM service. This Product and Risk Disclosure does not cover client specific information or recommendations based on the objectives of a particular client. We recommend that you read this Product and Risk Disclosure and use it to decide whether EPM products and services meet your individual objectives and that they fit within your risk appetite.
Your Counterparty
Ebury Partners Markets Limited is authorised and regulated by the Financial Conduct Authority ("FCA") with Firm Reference Number 784063 and is your Counterparty distributor for the purposes of any contract you may hold.
2. Risk Disclosure
Trading in any OTC derivatives involves a significant risk of loss and is not suitable for everyone but only for customers who:
(a) Understand and are willing to assume the economic and other risks associated with such products and trading methods.
(b) Have sufficient knowledge and experience about OTC derivatives and their underlying assets, as well as currency exchanges.
(c) Are financially able to assume losses, which may exceed margins and deposits because the contract may lose its value.
Derivative products carry a higher level of risk. Persons trading such products are required to understand the risks and the possible losses arising as a result of these trades.
Please note
This Risk Disclosure is not intended to direct you towards any of the products at EPM but merely provide you with information (and a non-exhaustive list) of the risks which may apply to you when trading with our products.
The risks outlined in this Disclosure could occur in conjunction with one another and could affect you as a client of EPM at any time in your relationship with us.
Consider all potential risks outlined before entering into any product contract with EPM and ensure that you understand the terms and risks of each product and the potential for loss of capital before committing to a relationship with us.
All products at EPM will require you to cover the agreed margin if the market moves against you and your deposit does not cover your position.
See the section on Margin Calls for more information.
Risks by Type
- Counterparty Risk: The risk that EPM as your Counterparty become unable to uphold the terms of your contract. This may be because of a lack of liquidity or other unexpected circumstances such as the closure of EPM. Additionally Counterparty Risk may arise as a result of EPM's own Counterparty Risk with its Banking Partners and Liquidity Providers.
- Liquidity Risk: Depending on the currencies, the market may be inherently less liquid (and/or more exposed to fluctuations) in comparison to markets of major currencies.
- Foreign Markets and Currency Risk: The fluctuations of Foreign Markets and Currencies affect the potential outcome of the trades. Any changes in the exchange rates may have a negative effect in the contract's value, price and performance.
- Volatility Risk: Derivatives can be highly volatile and the price may fluctuate rapidly and over wide ranges as a result of unforeseeable events or changes in the market conditions, none of which are under EPM's controls.
- Market Risk: The risk that the currency market fluctuates and with it the mark-to-market value of EPM contracts change. Please note that there is no guarantee that market movements will benefit you as an investor and the changing value of your contract may not correlate exactly with the currency market. This risk is amplified by the use of leverage and can also be affected by the use of hedging (see "risks associated with leverage and hedging"). Changing interest rates can also impact the mark-to market valuation of a contract. Prospective clients of EPM should also consider that the markets themselves can be impacted by a range of external, uncontrollable factors including but not limited to war, government intervention/changes in governmental policy and natural disasters.
- Force Majeure: The risk that a large scale event occurs (usually temporarily) that affects EPM's ability to uphold your contract. These typically include man made events such as war and environmental events such as natural disasters and pandemics. Where these are temporary, EPM will endeavour to resume service provision where possible after the impact of the force majeure event.
- Collateral Risk: If you deposit collateral as a security (i.e. the transfer of ownership to the firm), you are further taking a credit risk against EPM (i.e. that EPM cannot pay you back).
- Margin at Risk: As the derivatives operated under EPM are OTC, you may be required to provide Margin. As such depending on whether the contract is In the Money, Out of the Money, or At the Money you may be requested to deposit further funds to cover the positions.
Important Information
This Product and Risk Disclosure Document includes factual information. It is intended for clients of EPM categorised as Professional or Eligible Counterparty under MIFID II (Onshored). If you do not meet the requirements to be categorised as a Professional Client or Eligible Counterparty (and you do not meet the requirements to change your categorisation) you can not access EPM products and services and this Disclosure is not intended for you.
Ebury can solely determine the meaning of undefined terms in the Product Descriptions including, but not limited to: spot rate, spot market, forward rate and exchange rate, with reference to what it reasonably believes are established market practices in the United Kingdom.
3. Deliverable Forwards
Product Description
A Deliverable Forward is a contract that provides the client the ability to buy or sell a predetermined Notional Amount of currency (at a fixed rate) on a specific future date. A Deliverable Forward allows you to fix in at a specific Exchange Rate today. A Forward Contract protects you from unfavourable currency fluctuations.
Advantages
- Deliverable Forwards provide protection against unfavourable foreign exchange movements between the Trade Date and the Maturity Date.
- Deliverable Forwards are available in a large number of currency pairs.
- Deliverable Forwards are flexible. The Maturity date, Window dates and the Notional Amount can be tailored to meet your needs and objectives
Disadvantages
- You will lose any benefit of a Exchange Rate movement between the Trade Date and the Maturity Date.
- Cancellations or amendments to the Forward may result in a cost to the client
- If the spot market moves unfavourably Ebury may make a Margin Call to cover the out-the-money position
Example
Entering into an Deliverable Forward contract, you define at booking: Notional Amount, the currencies involved (the Settlement Currency and the Target Currency), Window dates and the Maturity date.
For Example, a client wants to protect against a fall in GBPUSD, and needs to protect $5,000,000 USD over a 6 month period. The 6 month GBP/USD Forward Rate is 1.1800
At Maturity or during the Window Dates the client will settle the Notional Amount of the Deliverable Forward at the pre-agreed Protection Rate of 1.18.
Example Scenarios
Scenario 1: At Maturity, the GBP/USD Exchange Rate is trading at 1.1600. The agreed Forward Rate is 1.1800, therefore the client is obligated to deliver $5 Million Notional Amount at 1.1800.
Scenario 2: At Maturity, the GBP/USD Exchange Rate is trading at 1.2100. The agreed Forward Rate is 1.1800, therefore the client is obligated to deliver the $5 Million Notional Amount at 1.1800.
4. Non-Deliverable Forwards
Product Description
A Non-deliverable Forward (NDF) is a contract which protects you against unfavourable exchange rate movements. It is a cash settled contract, meaning that there is no exchange of currencies at maturity as there is with a deliverable foreign exchange transaction. Rather, there is a single amount cash-flow position that is payable by either you or Ebury. A Forward Rate is agreed up-front, with the Fixing Rate, Fixing Source and the Fixing Date. The Forward Rate and Fixing Rate are used to calculate the cash-flow Settlement Amount payable on Maturity.
An NDF could be appropriate to help manage your foreign exchange risk from exporting or importing goods purchased in foreign currency, investing or borrowing, repatriating profits or funds converting foreign currency dividends, or settling currency arrangements.
An NDF should only be used where you have a foreign currency commercial need to mitigate foreign exchange risk associated with foreign currency. It should not be used for speculative purposes.
Advantages
- NDFs provide protection against unfavourable foreign exchange movements between the Trade Date of the NDF and the Maturity.
- NDFs are available in a large number of currencies.
- In markets or currencies where restrictions do not allow delivery of currency, NDFs help with mitigating currency risk.
- NDFs are flexible. The Maturity and the Notional Amount can be tailored to meet client's needs and objectives
Disadvantages
- You will lose any benefit of a foreign exchange movement between the Trade Date and the Maturity.
- Cancellations or amendments to the NDF may result in a cost to the client
- If the spot market moves unfavourably Ebury may make a Margin Call to cover the out-the-money position
Example
Entering into an NDF, a client defines at booking: the Notional Amount ,the currencies involved (the settlement Currency and the target Currency) and the Maturity.
For Example, a client wants to protect against a fall GBPMYR, and needs to protect 5,000,000 MYR over a 6 month period. The 6 month GBP/MYR NDF rate is 5.400
Example Scenarios
Scenario 1: At Maturity, the GBP/MYR fixing rate is 5.200. The agreed Forward Rate is 5.400, therefore the NDF creates a positive cash-flow position of (5,000,000/5.400) £925,925.93 - £961,538.46 (5,000,000/5.200) = £35,612.53. Ebury will then settle £35,612.53 to the client.
Scenario 2: At Maturity, the GBP/MYR fixing rate is 5.600. The agreed Forward Rate is 5.400, therefore the NDF creates a negative cash-flow position of (5,000,000/5.400) £925,925.93 - £892,857.14 (5,000,000/5.600) = £33,068.79. The Client will then settle £33,068.79 to Ebury.
5. What is an Option?
Product Description
An Options is a contract that gives the holder the right, but not the obligation, to buy or sell a currency (the underlying asset) at a set exchange rate and/or within a pre-set timeframe. As this is a "right" a premium is paid to the Seller.
Options are a popular way for businesses to protect themselves from adverse currency fluctuations. They can allow greater flexibility and ability to attain a protected rate.
Foreign exchange Options are derivatives which are based on the value of the underlying assets (Currency pairs) and involves a wide variety of contracts which are available through EPM.
The Options Contracts which Ebury offer are:
- Vanilla Options
Structured Options
- The Participating Forward
- The Forward Extra
- The Leveraged Forward Extra
- The Range Forward
- The Leveraged Range Forward
- The Leveraged Forward
We may also, from time to time, offer variations on these strategies, or create different combinations.
All of the above available options are discussed in this Product and Risk Disclosure document and if you have any further questions, please contact your sales representative at EPM who can provide you further information on these products.
What is a Structured Option
Structured Options are a combination of foreign exchange options packaged together. They can be used as an alternative to forwards and singular Vanilla Options. A Structured Option is constructed by buying and selling Options to provide a client with a tailored product to meet their risk management objectives. Depending on the Structured Option type, they may allow participation in favourable market conditions whilst maintaining a protected rate.
A Structured Option is a contract to exchange an amount of one currency for another currency at a Foreign Exchange Rate determined by the outcome of the product at Expiry. The delivery of the currencies takes place within two business days after the Expiry (Delivery Date).
6. Benefits of Options
The following are some of the benefits of a foreign exchange Options contract:
- Options give you flexibility when hedging foreign currency exposures.
- Option provide you with protection, but may also allow you to benefit should the Exchange Rate move in your favour. This means your outcome may be more favourable than a Forward Contract.
- Options can provide you with a worst case rate like a Forward Contract. This means that you know the Maximum Amount you will have to pay in the future so you will be better able to manage your cash flows and costs.
- Options can be used to produce hedging strategies that are tailored to fit your exposure, currency forecast and risk appetite.
Risks of Options
If you do not fully understand the features, outcomes and risks associated with foreign exchange Options then you should not use them. This section sets out some of the risks which are specific to a foreign exchange Options.
- Unlike a Forward Contract, you may have to pay a nonrefundable premium up front.
- When you enter into a zero premium Structured Option with a permanent Protection Rate, the Protection Rate may be less favourable than the prevailing Forward Rate or Spot Rate.
- When you enter into an Structured Option with a Protection Rate, your participation in favourable Exchange Rate movements may be limited.
- If your circumstances change and you no longer require an option structure prior to the delivery date, you may need to closeout or extend the contract which could incur a loss.
- Depending on the Option structure and the credit terms with Ebury, you may be required, on short notice, to respond to a margin call and provide additional funds to cover your position.
Leverage
Leverage occurs in some structured options. Leverage, in this context, refers to an option structure where the potential obligation is of greater Notional Amount than that of the right you hold.
Therefore, you may be obligated to buy, or sell, a larger Notional Amount than you have a right to buy or sell. These contracts may move further and faster out of the money from the same unfavourable movement than their non-leveraged equivalent products. Leverage can increase the size of gains or losses, so please consider the impact that leverage can have on your position/s as a whole and any downside risk as part of your risk management strategy.
7. Vanilla Options
Product Description
A Vanilla Option provides you with the right to buy/sell a currency pair on a predetermined date and time at a predetermined rate. The buyer of a Vanilla Option has the right but not the obligation to sell a specified Notional Amount of one currency for another currency at a nominated Protection Rate at Expiry (also called a Strike Rate, in the case of Vanilla Options).
At the Expiry of a Vanilla Option you have the right to deliver the currency at the Protection Rate or instead, you can buy a Spot Contract at the prevailing Spot Rate if it is more favourable. The Vanilla Option combines the certain protection provided by a Forward Contract and the flexibility of no obligation to trade at the predetermined Protection Rate. The buyer of a Vanilla Option must pay a Premium.
Possible Scenarios
Scenario 1:If the Exchange Rate at Expiry is less favourable than the Protection Rate. The client has the right but not the obligation to transact at the Protection Rate.
Scenario 2: If the Spot Rate at expiry is more favourable than the Protection Rate. The client will not exercise the Vanilla Option and can trade at the prevailing Spot Rate.
Advantages
- The client has certainty of a worst case Exchange Rate
- The client has protection if the rate moves against unfavourable market movements
- The client is able to participate in all favourable exchange rate movements
- Vanilla Options can never have a negative MTM, so there is no requirement for Margin at any stage.
Disadvantages
- The Premium is payable upon purchase of the Vanilla Option is not refundable under any circumstances.
- Depending on prevailing the Exchange Rates at Expiry, the total cost of the transaction (the Premium) may be more expensive than equivalent Fixed Forward or alternative product.
- At the Expiry or upon cancellation of the Vanilla Option, movements in the Exchange Rates plus the passage of time may result in the Vanilla Option reducing value or even having no value.
Example
For example, a client imports shoes from the US, and needs to buy USD 1 million 6 months from now to pay a supplier. The 6 month fixed forward rate is 1.1800 and the client doesn't want to get a worse rate than 1.1600 but would like to capitalise on favourable market movements. The client can purchase a Vanilla Option at 1.1600 maturing in 6 months. A Premium of GBP 20,000 would be payable to Ebury for the Vanilla Option.
Example Scenarios
Scenario 1: The Exchange Rate is trading at 1.1400 at Expiry, the client has the right to exercise the Vanilla Option and buy the Notional Amount USD $1m at the Protection Rate of 1.1600.
Scenario 2: The Exchange Rate is trading at 1.2500 at Expiry, and the Protection Rate is 1.1600. The client would not exercise the Vanilla Option and can transact at the prevailing Spot Rate of 1.2500.
For an exporter the outcomes are much the same but the product works in the reverse direction.
Note: The examples are indicative only and the rates and other details used are not factual.
8. The Participating Forward
Product Description
The participating forward provides a protected worst case rate for the full hedged amount, like a forward contract. However, it allows participation on a predetermined portion of the Notional Amount. If the Spot Rate at expiry is more favourable than the Protection Rate, then you are only obligated to transact a predetermined proportion of the Notional amount at the Protection Rate. You are then free to transact the remainder at the Spot Rate. There is no Premium payable for a Participating Forward.
Possible Scenarios
Scenario 1: If the Exchange Rate on the Expiry is less favourable than the Protection Rate, the client has the right but not the obligation to transact the Notional Amount at the Protection Rate.
Scenario 2: If the Exchange Rate on the Expiry is at or more favourable than the Protection Rate, the client is obligated to transact a predetermined percentage of the Notional Amount at the agreed Protection Rate, but also has the right to transact the remainder at the prevailing Spot Rate.
Advantages
- The client has certainty of a worst case rate
- The client has 100% protection if the Exchange Rate moves against them
- The client has partial benefit (50%) if the Exchange Rate moves in their favour
- No premium
Disadvantages
- The protection rate will always be less favourable than the comparable fixed forward contract rate.
- The client can only partially benefit from favourable Exchange Rate movements.
- If the Exchange Rate moves unfavourably Ebury may make a Margin Call to cover the out-the-money position
Example
For example, a client is an importer and forecasts that they will pay 1 million USD in 6 months time. The GBP/USD Fixed Forward rate for 6 months is 1.1800. The client would like to give themselves a worst case rate but are worried that if they enter into a Fixed Forward Contract, the rate will move higher and therefore they will not benefit from any positive moves in the Exchange Rate.
The client wants to benefit from upwards movement in the GBP/USD rate, but does not want to pay a Premium for this. Ebury informs the client that they can have a Protection Rate of 1.1700 on the full Notional Amount – However, if the GBPUSD rate is higher on the Expiry, they'll only be obligated to buy 50% of the notional at 1.1700 and the remaining 50% at the more favourable prevailing Spot Rate.
Example Scenarios
Scenario 1: The Exchange Rate is trading at 1.1600 on the Expiry. The client would exercise the Option and buy Notional Amount USD $1m at the Protection Rate of 1.1700
Scenario 2: The Exchange Rate is trading at 1.2300 on the Expiry. The client will be obligated to buy $500,000 USD at 1.1700 and the remaining $500,000 USD can be bought at the Spot Rate of 1.2300. This will give the client an average rate of 1.2000.
For an exporter the outcomes are much the same but the product works in the reverse direction.
Note: The examples are indicative only and the rates and other details used are not factual.
9. The Forward Extra
Product Description
The Forward Extra enables you to fix a Protection Rate for the currency pair that you are looking to buy/sell on a predetermined date in the future. You also set a Knock In Rate and, if the Exchange Rate trades at or more favourably than the Knock In Rate at any time during the Observation Period, you are obligated to transact the Notional Amount at the Protection Rate. If the Exchange Rate has not traded at or more favourably than the Knock In rate, and the Exchange Rate on the Expiry is above the Protection rate, you may choose to transact at the prevailing Spot Rate.
*Observation Period can be constantly observed, windowed or at expiry
Possible Scenarios
Scenario 1: If the Exchange Rate on the Expiry is less favourable than the Protection Rate and has not traded at or above the Knock In rate at any point during the specified Observation Period, the client has the right but not the obligation to transact the Notional Amount at the Protection Rate.
Scenario 2: If the Exchange Rate on the Expiry is more favourable than the Protection Rate and has not traded at or above the Knock In Rate during the Observation period, the client will not exercise the Option and can transact at the prevailing Spot Rate.
Scenario 3: If the Exchange Rate has traded at or a more favourable rate than the Knock In Rate on the Expiry or during the Observation Period, the client is obligated to transact the Notional Amount at the Protection Rate.
Advantages
- The client has certainty of a worst case rate.
- The client has protection if the rate moves against them.
- The client can benefit from favourable currency movement up to but not including the Knock In Rate.
- No Premium is payable.
Disadvantages
- If the Exchange Rate trades at or above the Knock In Rate at anytime during a specified Observation Period, the rate converts to the Protection Rate. In this case, the client would have achieved a more favourable rate using a Forward Contract.
- The Protection Rate will always be less favourable than the comparable fixed forward contract rate.
- If the Exchange Rate moves unfavourably Ebury may make a Margin Call to cover the out-the-money position
Example
For example, a client is an importer and they forecast having to purchase $1 million USD in 6 months time. The Fixed Forward Rate for 6 months is 1.1800 and the client wants to take advantage of possible further weakening in the US dollar . They would like to take advantage of this Fixed Forward Rate but have a view that the GBP/USD will appreciate higher over the next 6 months. Therefore, they accept a Protection Rate of 1.1700. This enables the client to benefit from a favourable move in 100% of their exposure up to but not including the Knock In Rate of 1.2500. If the Exchange Rate trades at or above 1.2500 at any time during a specified Observation Period, the client is now obligated to purchase Notional Amount $1 million USD at the Protection Rate of 1.1700.
Example Scenarios
Scenario 1: The Exchange Rate is trading at 1.1600 on the Expiry and has not traded at or above the Knock In Rate of 1.2500 at any point during the specified Observation Period. The client would exercise the Option and transact the Notional Amount USD $1m at the Protection Rate of 1.1700.
Scenario 2: The Exchange Rate is trading at 1.2300 on the Expiry and has not traded at or above the Knock In Rate of 1.2500 at any point during the specified Observation Period. The client has the right to transact at the prevailing Spot Rate of 1.2300.
Scenario 3: The Exchange Rate has traded at or above the Knock In rate of 1.2500 during the Observation Period therefore obligating the client to transact the Notional Amount USD $1m at the Protection Rate of 1.1700.
For an exporter the outcomes are much the same but the product works in the reverse direction.
Note: The examples are indicative only and the rates and other details used are not factual.
10. The Leveraged Forward Extra
Product Description
The Leveraged Forward Extra enables you to fix an enhanced Protection Rate for the currency that you are looking to sell on a predetermined date in the future. You also set a Knock In Rate and if the Exchange Rate trades at or more favourably than the Knock In Rate at any time during the Observation Period and is at or more favourably than the Protection Rate at the Expiry, you are obligated to transact at the Protection Rate for the Leveraged Notional Amount. If the Exchange Rate has not traded at or more favourably than the Knock In Rate, and the Exchange Rate at the Expiry is more favourable than the Protection Rate, you may choose to transact at the prevailing Spot Rate.
*Observation Period can be constantly observed, windowed or at expiry
Possible Scenarios
Scenario 1: If the Exchange Rate at the Expiry is less favourable than the Protection Rate and has not traded at or above the Knock In Rate, the client has the right but not the obligation to transact at the Protection Rate.
Scenario 2: If the Exchange Rate at the Expiry is more favourable the Protection Rate and has not traded at or at a more favourable rate than the Knock In Rate during the Observation Period, the client will not exercise the Option and can transact at the prevailing Spot Rate.
Scenario 3: If the Exchange Rate has traded at or at a more favourable rate than the Knock In Rate at the Expiry or during the Observation Period, the client is obligated to transact the Leveraged Notional Amount at the Protection Rate.
Scenario 4: If the Exchange Rate has traded at or at a more favourable rate than the Knock In Rate during the Observation Period, and the Exchange Rate is less favourable rate than the Protection Rate at the Expiry, the client maintains the right to transact the Notional Amount at the Protection Rate.
Advantages
- The client has certainty of a worst case rate for the un-leveraged Notional Amount.
- The client has protection if the Exchange Rate moves against them (hedged amount).
- The client can benefit from favourable currency movement up to but not including the Knock In Rate.
- No Premium is payable.
Disadvantages
- If the Exchange Rate trades at or above the Knock In Rate at any time during the Observation Period and expires above the Protection Rate, the client is obligated to trade at the Protection Rate for the Leveraged Notional Amount.
- If the Exchange Rate at the expiry is below the Protection Rate, the client only has protection on the unleveraged amount.
- If the Exchange Rate moves unfavourably Ebury may make a Margin Call to cover the out-the-money position
Example
For example, an importer forecasts having to purchase $2 million USD in 6 months time. The Fixed Forward Rate for 6 months is 1.1800 and the client wants to take advantage of possible further weakening in the US dollar. They would like to take advantage of this Fixed Forward Rate but has a view that the USD will strengthen over the next 6 months. The client takes a Leveraged Forward Extra, so they protect $1 million but have the potential obligation of $2 million. Therefore, they accept a the enhanced Protection Rate of 1.1800. This enables the client to benefit from an enhanced Protection Rate and the ability to participate in a favourable move for 100% of their exposure up to but not including the Knock In Rate of 1.2800. If the Exchange Rate trades at or above 1.2800 at any time during the specified Observation Period, the client is now obligated to buy the Leveraged Notional Amount of $2 million USD at the Protection Rate of 1.1800.
Scenario 1: The Exchange Rate is trading at 1.1600 at the Expiry and has not traded at or above the Knock In Rate of 1.2800. The client would exercise the Option and transact the Notional Amount USD $1m at the Protection Rate of 1.1800.
Scenario 2: The Exchange Rate is trading at 1.2600 at the Expiry and has not traded at or above the Knock In Rate of 1.2800. The client has the right to transact at the prevailing Spot Rate of 1.2600.
Scenario 3: The Exchange Rate has traded at or above the Knock In Rate of 1.2800 during the Observation Period therefore obligating the client to transact the Leveraged Notional Amount $2 million USD at the Protection Rate of 1.1800.
Scenario 4: The Exchange rate has traded at or above the Knock In Rate of 1.2800 during the Observation Period, but at the Expiry the Exchange Rate falls to 1.1600, the client has the right to transact USD $1m Notional Amount at the Protection Rate of 1.1800.
For an exporter the outcomes are much the same but the product works in the reverse direction.
Note: The examples are indicative only and the rates and other details used are not factual.
11. The Range Forward
Product Description
The Range Forward enables you to fix a Protection Rate for the currency pair that you are looking to buy/sell on a predetermined date in the future. You also set a Cap Rate and, if the Exchange Rate trades at or more favourably than the Cap Rate at Expiry, you are obligated to transact at the Cap Rate. If the Exchange Rate is trading less favourably than the Cap Rate, and the Exchange Rate on the Expiry is more favourable than the Protection Rate, you may choose to transact at the prevailing Spot Rate.
Possible Scenarios
Scenario 1: If the Exchange Rate at expiry is less favourable than the Protection Rate, the client has the right but not the obligation to transact at the Protection Rate.
Scenario 2: If the Exchange Rate at Expiry is more favourable than the Protection Rate but less favourable than the Cap Rate. The client will not exercise the Option and can transact at the prevailing Spot Rate.
Scenario 3: If the Exchange Rate at Expiry is at or a more favourable rate than the Cap Rate. The client is obligated to transact the Notional Amount at the Cap Rate.
Advantages
- The client has certainty of a worst case rate.
- The client has protection if the Exchange Rate moves against them.
- The client has a benefit if the Exchange Rate moves in their favour, up to the Cap Rate.
- No Premium is payable
Disadvantages
- If the Exchange Rate moves unfavourably (lower than the worst case rate), a more favourable rate would have been achieved with a Forward Contract.
- The client can only benefit up to the Cap Rate
- If the Exchange Rate moves unfavourably, Ebury may make a Margin Call to cover the out-the-money position
- The Protection Rate will always be less favourable than the comparable Fixed Forward Rate
Example
For example, a client is an importer and they forecast having to purchase $1 million USD in 6 months time. The Fixed Forward Rate for 6 months is 1.1800 and the client wants to take advantage of possible further weakening in the US dollar. They would like to take advantage of this Fixed Forward Rate but have a view that the GBP/USD will move lower over the next 6 months. Therefore, they accept a Protection Rate of 1.1600. This enables the client to benefit from a favourable rate move on 100% of their exposure up to but not including the Cap Rate of 1.2300. If the Exchange Rate trades at or above 1.2300 the client is now obligated to purchase USD at the Cap Rate of 1.2300.
Scenario 1: The Exchange Rate is trading at 1.1500 at the Expiry, so the client would exercise the Option and can transact the Notional Amount USD $1m at the Protection Rate of 1.1600.
Scenario 2: The Exchange Rate is trading at 1.2100 at the Expiry, above the Protection Rate of 1.1600 and below the Cap Rate of 1.2300. The client would not exercise the Option and can transact at the prevailing Spot Rate of 1.2100.
Scenario 3: The Exchange Rate is trading at 1.2500 at the Expiry, above the Cap Rate of 1.2300, therefore obligating the client to transact the Notional Amount USD $1m at the Cap Rate of 1.2300.
For an exporter the outcomes are much the same but the product works in the reverse direction.
Note: The examples are indicative only and the rates and other details used are not factual.
12. The Leveraged Range Forward
Product Description
The Leveraged Range Forward enables you to fix an enhanced Protection Rate for the currency that you are looking to sell on a predetermined date in the future. You also set a Cap Rate and if the Exchange Rate trades at or more favourably than the Cap Rate at Expiry you are obligated to transact at the Cap Rate for the Leveraged Notional Amount. If the Exchange Rate is trading at or less favourably than the Cap Rate, and the Exchange Rate at the Expiry is more favourably than the Protection Rate, you may choose to transact at the prevailing Spot Rate.
Possible Scenarios
Scenario 1: If the Exchange Rate at the Expiry is at a less favourable rate than the Protection Rate. The client has the right but not the obligation to transact at the enhanced Protection Rate.
Scenario 2: If the Exchange Rate at the Expiry is at a more favourable rate than the enhanced Protection Rate but less favourable then the the Cap Rate. The client will not exercise the Option and can transact at the prevailing Spot Rate.
Scenario 3: If the Exchange Rate at the Expiry is at or at a more favourable rate than the Cap rate. The client is obligated to transact the Leveraged Notional Amount at the Cap Rate.
Advantages
- The client has certainty of a worst case exchange rate.
- The client has protection if the Exchange Rate moves against them.
- The client has a benefit if the Exchange Rate moves in their favour up to the Cap Rate.
- No Premium is payable
Disadvantages
- The Protection Rate will always be less favourable than the comparable Fixed Forward Rate
- The client can only benefit from an improved Spot Rate up to but not including the Cap Rate
- If the Exchange Rate moves unfavourably Ebury may make a Margin Call to cover the out-the-money position
Example
For example, a client forecasts having to purchase $2 million USD in 6 months' time. The Fixed Forward Rate for 6 months is 1.1800 and the client wants to take advantage of possible further weakening in the US dollar. They would like to take advantage of this Fixed Forward Rate but has a view that the USD will strengthen over the next 6 months. The client trades a Leveraged Range Forward , so they protect $1 million but have the potential obligation of $2 million. Therefore, they accept a enhanced Protection Rate of 1.1700. This enables the client to benefit from an enhanced Protection Rate and the ability to participate in a favourable rate move on 100% of their exposure up to the Cap Rate of 1.2400. If the Exchange Rate trades at or above 1.2400 at the Expiry the client is now obligated to transact the Leveraged Notional Amount of $2 million USD at the Cap Rate of 1.2400.
Scenario 1: The Exchange Rate is trading at 1.1600 at the Expiry, so the client would exercise the Option and transact the Notional Amount USD $1m at the enhanced Protection Rate of 1.1700.
Scenario 2: The Exchange Rate is trading at 1.2300 at the Expiry, above the Protection Rate of 1.1700 and below the Cap Rate of 1.2400. The client would not exercise the Option and would transact at the prevailing Spot Rate of 1.2300.
Scenario 3: The Exchange Rate is trading at 1.2600 at the Expiry, above the Cap Rate of 1.2400, therefore obligating the client to transact the Leveraged Notional Amount USD $2m at the Cap Rate of 1.2400.
For an exporter the outcomes are much the same but the product works in the reverse direction.
Note: The examples are indicative only and the rates and other details used are not factual.
13. Leveraged Forward
Product Description
The Leveraged Forward provides a protected worst case rate for your chosen Notional Amount, like a Forward Contract. The Protection Rate is enhanced compared with the prevailing Forward Rate but, if the Exchange Rate is more favourable than the Protection Rate at the Expiry, you are obligated to transact the Leveraged Notional Amount at the Protection Rate.
Possible Scenarios
Scenario 1: If the Exchange Rate at the Expiry is less favourable than the Protection Rate, you have the right but not the obligation to transact at the Protection Rate.
Scenario 2: If the Exchange Rate on the Expiry is at or a more a favourable rate than the Protection Rate, you have the obligation to transact the Leveraged Notional Amount at the Protection Rate.
Advantages
- You have certainty of a Protection Rate.
- You have protection if the Exchange Rate moves unfavourably.
- You have an enhanced Protection Rate compared to the prevailing Forward Rate
- No Premium is payable
Disadvantages
- If the Exchange Rate is at or more favourable than the enhanced Protection Rate at the Expiry time and date, you are obligated to trade the Leveraged Notional Amount at the Protection Rate
- If the Exchange Rate moves unfavourably Ebury may make a Margin Call to cover the out-the-money position
Example
For example, a client imports cars from the US and they forecast having to purchase $1 million USD in 6 months time. The Fixed Forward rate for 6 months is 1.1800 and the client wishes to protect themselves from a fall in the GBPUSD Exchange Rate. The client has set their budget rate at 1.2000 does not want to lock in FX losses. The client would like to have protection from unfavourable movements in the Exchange Rate and has the requirement to purchase the Leveraged USD Notional Amount if required. They accept a Protection Rate of 1.2000 for USD 1,000,000. They are fully protected from unfavourable movements in the Exchange rate, but if the Exchange Rate trades at or above 1.2000 at the Expiry, they will be obligated to transact the Leveraged Notional Amount of USD 2,000,000 at 1.2000.
Scenario 1: The Exchange Rate is trading at 1.1700 at the Expiry, so the client would exercise the Option and transact the Notional Amount USD 1,000,000 at the Protection Rate of 1.2000.
Scenario 2: The Exchange Rate is trading at 1.2200 at the Expiry, so the client would be obligated to transact the Leveraged Notional Amount USD 2,000,000 at 1.2000.
For an exporter the outcomes are much the same but the product works in the reverse direction.
Note: The examples are indicative only and the rates and other details used are not factual.
14. Margin Calls
What is a Margin Call?
A Margin Call is a form of collateral, or additional deposit, which is requested when your position moves out of the money ('OTM') by more than your Variation Margin threshold. An agreed Margin Call amount will be requested and held against the negative Mark-to-Market ('MTM') value of a contract or portfolio of contracts open with EPM. Margin call will not be calculated or held against Deliverable Forward contract positions.
Ebury does not enter into trades which would be in-scope for variation margin or initial margin under UK European Market Infrastructure Regulation.
Credit Lines
You will have credit conditions agreed with Ebury that will specify your Initial Margin, Variation Margin and Margin Call percentages as well as a maximum Notional limit and Tenor for contracts. Your Variation Margin ('VM') limit is the maximum adverse market movement Ebury will allow before triggering a Margin Call. Your VM limit is expressed as a percentage, and the lower the VM percentage the sooner you will be margin called when the market moves out of the money in relation to your booked contract(s). Your credit conditions will be determined on our assessment of your individual business circumstances.
Ebury daily monitors the MTM value of your contract(s) in order to determine if your Variation Margin limit has been reached. If the aggregated negative market value of your contracts exceeds the VM limit, Ebury will issue a Margin Call to cover the position.
How does this work in practice?
As an example, you may be a UK importer who have hedged 12 months of USD1.2m purchases using a Forward Extra contract with a protected rate of 1.20. Ebury have agreed to offer credit conditions on this trade to allow no Initial Margin, but a 5% Variation Margin limit and a 5% Margin Call. During the life of this contract Ebury will monitor the MTM value in order to determine if the VM limit is breached. If the MTM value moved negatively exactly by 5%, and therefore £50k out of the money; you will be Margin Called 5% of the notional amount which equates to a £50k Margin Call to cover the position.
Is this a cost?
No. Margin is a deposit that will either be (a) refunded to you or your account balance prior to Expiry/Maturity if it is no longer required, such as if the exposure on your contract(s) retraces to a level that equals your Variation Margin less the Margin Call as stated in your credit conditions or (b) it will simply be deducted from the settlement amount required once the contract expires/matures.
Margin Call settlement
You will have 48 hours to settle the Margin Call amount in full from the point the Margin Call is issued. If you fail to pay the Margin to Ebury within 48 hours, Ebury may (in its sole discretion) Close Out any or all of your FX Option Products. If the Close Out results in any Loss or amounts owing to Ebury, then Ebury may immediately deduct the total amount of any such Loss or amounts owing (together with costs) from your General Client Account. If there are insufficient funds on Account for Ebury to deduct such an amount, you shall pay any Loss or amounts owing to Ebury within 24 hours of being notified by Ebury of the total amount due in accordance with Ebury's request.
15. Costs and Charges
EPM is committed to providing transparency of the costs and charges related to its products and services. All EPM clients are provided with their pre-trade disclosure document which includes the pre-agreed spread relating to their transactions. EPM is committed to ensuring that it always remains within the pre-agreed spread which takes into account a range of costs and charges applicable to each individual trade including:
- Costs for the Investment and/or ancillary service
- Ongoing charges related to the provision of investment services
- Costs related to the transaction
- Financing Costs (if applicable)
- Incidental Costs
In addition to the above, EPM also provides its clients with a trading statement which includes a breakdown of the historic data of opened and closed trades of the last quarter, including a detailed breakdown of the total costs and changes which were paid by the client over the period.
Note: As required by our regulatory obligations, in instances where we do not have the actual costs available, we must make a reasonable estimation of the costs which will be clearly disclosed and label as such in our communications. This estimation may rely on:
- Historic data (if transactional data are not available).
- Reasonable overall estimations based on similarly identifiable transactions.
- Through the identification of all expected transactions costs related to the trade.
Through our internal policies and controls, we aim to ensure that costs and charges remain fair and our communications to our clients are clear. If you have any questions relating your costs and charges or want a cleared understanding of what is communicated with you, please contact your assigned person who would be able to assist with any queries.
16. Glossary
Business Day - means a day on which banks are generally open for banking business in Switzerland.
GBP - means Great British Pound.
Cap rate - means a spot or forward rate which may fluctuate but cannot surpass a spot or forward rate agreed by you and Ebury in advance of the Trade Date or as otherwise agreed by you and Ebury.
Credit terms - means a facility provided by Ebury to you or another customer, at Ebury's sole discretion, for transacting in foreign exchange derivatives.
Ebury - Ebury Partners Markets Ltd
Exchange Rate - is the value of one currency for the purpose of conversion to another.
Exercise - means an election by the holder of a Put Option or Call Option to buy or sell currency (as applicable) at the Strike Rate on the Expiration Date.
Expiry - means the date and time on which an Option expires and will define the whether the Option is Exercised ir Lapse and what rate the client will be able to achieve.
Favourable - means, in the context of the movement of a foreign exchange rate, that the outcome of such a movement may result in an economically advantageous outcome for you.
Forward Contract - is a legally binding agreement between you or another customer and Ebury to exchange one currency for another at an agreed Exchange Rate on a Value Date more than two (2) Business Days after the Trade Date.
Forward Extra - A Structured Option which provides a guaranteed Protection Rate and also allows you to fully participate in favourable exchange rate movements, provided the currency pair has not traded at or above a pre-specified Knock In Rate.
Leverage - A pre-agreed amount in a Structured Option that you may be obliged to transact at if certain conditions are met.
Leveraged Forward - A Structured Options which provides a guaranteed Protection Rate like a Forward Contract. The rate is better compared with the prevailing Forward Contract but, if the spot is more favourable than the protection rate at expiry, you are obliged to execute at a leveraged amount.
Leveraged Forward Extra - A Structured Option that provides a potential enhanced Strike Rate for future exchange requirements with the opportunity to participate in favourable exchange rate movements, provided the currency pair has not breached a prespecified Knock In Rate. If the Knock In Rate is breached at any time during the Window Period, then you could be required to exchange the Leveraged Notional Amount at the Strike Rate.
Leveraged Notional Amount - is the Notional Amount multiplied by an amount as agreed by Ebury and you on the relevant Trade Date.
Margin - is one or more payments which may from time to time be required by Ebury in its discretion as security in connection with a transaction contemplated in this Information Sheet.
Maximum Amount - means the predetermined total amount to be bought or sold during the term of a Structured Option.
Notional Amount - means the predetermined CHF or foreign currency amount to be bought or sold pursuant to an Option or Forwards.
Put Option - means a contract which gives the holder the right, but not the obligation to sell a specific currency at a specific price within a defined period of time.
Option or FX Option Product - means individually and together, the options products described in this document including Vanilla Options, Call Options, Put Options, and/or Structured Options (including Leveraged Structured Options), as the context requires.
Out-of-the-Money - means for the purposes of Options, where the current market value of the Option contract is negative.
Participating Forward - A Structured Option that allows you to set a Worst case Rate but also gives you an opportunity to profit if the foreign exchange rate moves higher than the Worst case Rate, by giving you the option to trade some of your contract value at the higher and more favourable Spot Rate.
Participating percentage - is a percentage of the Notional Amount that may not be obligated in a Structured Option.
Premium - means, where applicable, the amount that is due and payable by you to Ebury in a freely transferable currency as specified by Ebury on the Premium Payment Date of an Option.
Premium Payment Date - is a Business Day on which you are required to pay a Premium to Ebury, as specified by Ebury.
Protection Rate - is an alternative term for Strike Rate and means the worst-case Exchange Rate that can be achieved in a Structured Option as agreed by Ebury and you.
Range Forward - A Structured Option which allows you to protect against the risk that the Spot Rate will be less favourable than a nominated Protection Rate. It also gives you the ability to participate in favourable movements in the spot market between your Protection Rate and a predetermined capped rate as agreed between Ebury and you in advance.
Spot Rate - means the current Exchange Rate for a given currency pair
Strike Rate - means the Exchange Rate that will apply to the purchase or sale of currency when a buyer Exercises its right under a Put Option or Call Option.
Structured Option product - means an agreement to exchange a specified amount of one currency for another currency at a foreign exchange rate created through the concurrent sale and purchase of two or more Call Options and/or Put Options.
Trade Date - means the Business Day on which Ebury enters into a FX Option Product with you.
Knock In Rate - means a foreign exchange rate as agreed by you and Ebury. If the prevailing spot rate reaches the Knock In rate during the relevant Observation Period, this will affect the rate at which you may need to exchange the currencies under the relevant FX Option Product.
Unfavourable - means, in the context of the movement of a foreign exchange rate, that the outcome of such a movement may result in an economically disadvantageous outcome for you.
USD - means United States Dollars.
Vanilla Option - means a Call Option or Put Option that has standardised terms and no special or unusual features.
Observation Period - means a predetermined period during which Ebury and you will monitor the Knock In rate for the relevant FX Option Product
Constantly Observed - means that Ebury will monitor the Knock In Rate for the relevant FX Option from the Trade date to the Expiry
At Expiry - means that Ebury will monitor the Knock In Rate for the relevant FX Option Product only at the Expiry (date and time)
Mark-to-Market - a method of measuring the value of foreign exchange trades. Exchange rate fluctuations will influence the value of trades. Ebury uses Mark-to-Market valuations to calculate Margin Calls.
Ebury Partners Markets Ltd
Ebury Partners Markets Ltd (“EPM”) is authorised and regulated by the Financial Conduct Authority as an Investment Firm to MiFID derivative products.
Reference number: 784063 with registered office 100 Victoria St, London SW1E 5JL.
