50% participating forward

Yet another way of hedging currency risk is a 50% participating forward. You don’t pay a premium, but the worst case rate you agree to will be slightly worse than a forward contract rate. 

However, if the exchange rate moves in your favour, you’ll be able to benefit from 50% of any upside. The reason you don’t get 100% of the upside is that you don’t pay a premium. But you still have 100% protection if rates move against you.

Advantages

• Guaranteed worst case rate
• You benefit 50% in any favourable moves (unlimited)
• Zero premium to pay 

Disadvantages

• Your worst case rate is worse than a forward contract

How this works for an importer

Let’s say that the Forward Contract rate is 0.96. Your worst case rate is set at 0.93. 

Scenario 1 – On expiry, the spot rate is below 0.93

You buy your US dollars at 0.93

Scenario 2 – On expiry, the spot rate is above 0.93

You buy 50% of your US dollars at 0.93 and 50% at the higher spot rate. For example, if the spot rate is 1.01, you buy 50% at 0.93 and 50% at 1.01. So the actual rate you achieve is 0.97.

How this works for an exporter

Let’s say that the Forward Contract rate is 0.96. Your worst case rate is set at 0.99. 

Scenario 1 – On expiry, the spot rate is above 0.99

You sell your US dollars at 0.99

Scenario 2 – On expiry, the spot rate is below 0.99

You sell 50% of your US dollars at 0.99 and 50% at the lower spot rate. So, if the spot rat is 0.89, you sell 50% at 0.99 and 50% at 0.89. Which means the actual rate you achieve is 0.94.

Call us on 1 800 701 540 or +61  2 8298 4999 to see how we can help you.  Alternatively arrange for us to call you back.