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

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

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