Markets

Participating Forward

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This option strategy gives the buyer the certainty of a protected rate, with the opportunity to participate in favourable market moves for a pre-determined proportion of the total notional amount, on or up to a pre-agreed expiry date. Settlement of the trade will occur within two working days after the expiry date.

How it works

UK-based company Acme Ltd needs to make a purchase of USD 500,000 in 6 months. They would like to have protection against adverse market movements, but the ability to participate in favourable movement should this occur. They do not want to pay an upfront premium.

Acme Ltd executes a Participating Forward to buy USD 500,000 with an expiry date in 6 months and with a strike rate of 1.2000. They choose a participation amount of 50% (USD 250,000) should they be able to benefit from favourable market moves.

At expiry there are two possible outcomes:

Outcome 1

Outcome 2

Variables

Key benefits

Protection against adverse movements at a predetermined rate, adding clarity on future cashflows

Tailored to specific objectives, giving flexibility to decide the notional amount, participating amount, currencies and the settlement date

The right to participate in more favourable exchange rates for a pre-agreed proportion of the notional amount, giving the opportunity to improve the average rate

Can be structured at zero cost

Key risks

HSBC Innovation Banking only offers this product to clients classified as ‘Professional’ under MiFID regulation.

  • You are obliged to fulfil the agreed terms under the forward contract entered into even if your requirements change during the forward contract
  • Should the contract no longer be required, the cost of unwind (may be substantial) will be determined by the prevailing market rate at the time and will be payable by the client
  • The mark to market value of the contract will become positive or negative throughout the duration of the contract in line with market fluctuations
  • By entering into a forward contract with us, you become subject to our credit risk in respect of our ability to perform our obligations under the commodity forward contract. You will not receive any payment or delivery under the swap if we become insolvent or otherwise unable to pay or deliver.

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