Markets

Risk Reversal/ Collar

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This option strategy provides certainty of a protected, pre-agreed low strike rate, whilst giving the opportunity to participate in favourable market movement up to a pre-agreed high strike rate, on or up to a predetermined expiry date. The settlement of the contract will occur within two 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 an FX Collar Option to buy USD 500,000 with an expiry date in 6 months, at a low strike rate of 1.2000 and a high strike rate of 1.2500.

At expiry there are three possible outcomes:

Outcome 1

Outcome 2

Outcome 3

Product variables

Notional amount

High strike rate

Low strike rate

Spot rate

Currency pair

Expiry date

Settlement date

Pre-approved FX credit line

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, currencies and the settlement date

The right to participate in more favourable exchange rates up to a pre-agreed high strike rate

Can be structured as a zero-cost strategy

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 contract entered into even if your requirements change during the contract
Should the contract no longer be required, the cost of unwind 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 contract with us, you become subject to our credit risk in respect of our ability to perform our obligations under the contract. You will not receive any payment if we become insolvent or otherwise unable to pay or deliver

Disclaimer

Where HSBC Innovation Banking markets any foreign exchange (FX) products, it does so a distributor of such products, acting as agent for HSBC UK Bank plc and/or HSBC Bank plc.

If you do transact any FX products via HSBC Innovation Banking, any FX agreement will be with HSBC UK Bank plc or HSBC Bank plc on their terms of business, depending on the nature of the product and the client. You can find a link to the HSBC terms of business here

Any investment products are intended for experienced investors and you should be aware that the value of your investment may go down as well as up. Your capital may be at risk. HSBC Innovation Bank Limited does not provide Investment, Legal, Financial, Tax or any other kind of advice. Before entering into any foreign exchange transaction, you should seek advice from an independent Advisor, and only make investment decisions on the basis of your objectives, experience and resources.