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- Region: Australia
- Australia
- New Zealand
- UK/US/Europe
A participating forward for an Australian couple buying a house in France
Mr and Mrs Jones are due to pay €1m for the balance on a property in France in six months' time. The participating forward provides them with a worst case rate to purchase the euros, when they have to pay for the house. In addition, it also allows them to 'participate' in any favourable exchange rate move for 50% of the amount ie €500,000.
When they agreed the purchase, the exchange rate was 0.5100 and the six month forward contract rate was 0.5000. Mr and Mrs Jones were very worried about the falling exchange rate and didn't want to convert at anything worse than an exchange rate of 0.4800. However, they were optimistic that the rate might improve so didn't want to be locked in with a forward contract at 0.5000. They chose a participating forward with the worst case rate set at 0.4800.
Possible scenarios:
Scenario 1)The exchange rate falls and after six months is trading at 0.4600.
Mr and Mrs Jones can still purchase €1m at 0.4800
Scenario 2)The exchange rate rises and after six months is trading at 0.5500.
Mr and Mrs Jones are obliged to buy €500,000 at their worst case rate of 0.4800 but can buy the other €500,000 at the prevailing rate at the time of 0.5500. This gives them them an average rate for the whole €1m of 0.5150
The benefit of this option is that if the exchange rate rises, the average rate can be better than the forward rate. The disadvantage is that if the rate falls, they would have been better off booking a forward contract. Like a forward contract, there is no premium to pay when entering into a participating forward.
World First Pty Ltd holds an Australian Financial Services Licence - Licence No: 331945 -under the Corporations Act 2001 which authorises it to provide financial services in relation to foreign exchange contracts, derivatives and non cash payments facilities to persons within Australia.
