Global Markets In Malaysia

Foreign Exchange Risk Management

Foreign Exchange

How significant is your foreign exchange exposure to the financial health of your company? What strategies are your competitors pursuing? Do you need to develop a strategy to manage your foreign exchange exposures? The global markets operation of HSBC Malaysia, can assist in managing your foreign exchange exposures as well as providing you with economic updates and market research.

Identifying Your Exposure

Without a clear understanding of your foreign exchange exposure you can run into significant risks. Generally, foreign exchange exposure can be classified under three principal areas:

Transactional Exposure
Translation Exposure
Strategic Exposure

Whilst some or all of the above exposures may be found in many companies, their significance will vary from company to company depending upon your operations. Once recognised, these risks need to be considered and covered by using the range of products available to develop a suitable strategy.

Selection Of Products Offered

Spot Foreign Exchange
A spot contract is a binding obligation to buy or sell a certain amount of foreign currency at the current market rate, for settlement in two business days’ time.

Forward Exchange Contracts
A forward exchange contract (or forward contract) is a binding obligation to buy or sell a certain amount of foreign currency at pre-agreed rate of exchange, on a certain future date.

Currency Options
Currency Options give the holder of the option the right, but not the obligation, to buy or sell a specific amount of currency at a specific exchange rate, on or before a specific future date.

Why use options?
A forward contract provides protection but you are obliged to deal and at a specific rate. Therefore. your company is not in a position to take advantage of favourable movements in rates between booking the contract and completing the deal. A currency option overcomes these weaknesses. Once you have specified the details to us, and paid the premium, you know for certain the worst rate at which you will be able to buy or sell your currency. If the spot market rate or forward rate improves at any time up to the expiry date of the option, you can simply deal in the market and ignore the option.

Premium Calculation
We like to think of options as being like insurance. The best case scenario is when you don't have to exercise the option. The cost of an option is similar to the payment of an insurance premium. It is determined by the volatility of the two currencies, the rate specified and the period of the option.

Structured Forwards
A structured forward refers to foreign exchange forwards embedded with one or more currency options. Structured forwards retain the mechanics of plain vanilla forwards, except that the payoff is tailor made to meet the client's requirements. The customisation of the forwards allows the client to achieve a more efficient hedge and/or enhanced foreign exchange rate within the client's expressed views of the market. These products may provide more flexibility than vanilla forwards given the combination effect of optionality which may benefit the client, if the views expressed are correct.

Structured Investment Products
These are investment products linked to an identified foreign exchange rate and can be designed for relatively shorter investment tenors. The structures are tailor made to suit your views of the foreign exchange market and choice of currency pairs.

Managing Your Exposure

The development of a strategy requires a full understanding of the exposure you face and the principles behind the products available to manage these financial risks. There are three basic alternatives to manage your exposure:

Do nothing and simply deal in the spot market when the actual cash flow requirement occurs
Lock into fixed rates by way of forward contracts
Use flexible products such as currency options which offer both protection and upside potential

We recommend that you use a combination of these alternatives. Ideally you should aim to obtain protection while being able to retain upside potential. We can help you do this.

Contact Details

Please call or email us to discuss how we can help manage your exposures.

Alvin Kong
Tel: 603-9145 2522
alvinkong@hsbc.com.my

Tan Yew Yan
Tel: 603-9145 2522
tanyewyan@hsbc.com.my