Markets

Vanilla

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This option strategy gives the buyer the right, but not the obligation to exchange one currency for another, at an agreed strike rate, on or up to a preagreed expiry date. Settlement of the contract will occur two days after expiry.

A non-refundable premium is payable within two days of execution, this is usually calculated as a percentage of the notional amount.

How it works

UK-based company Acme Ltd has a potential need to sell GBP and buy USD in 6 months. To hedge against market volatility, Acme Ltd purchases a Vanilla Option. At expiry there are two possible outcomes:

Outcome 1

This provides a worst case (strike rate) that they have the right to transact at, but allows participation in favourable market movement at expiry should it occur.

Acme Ltd purchases a vanilla option with an expiry date in 6 months and a strike rate of 1.2000. The premium payable is 2.5% of the notional.

Outcome 2

Variables

Key benefits

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

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

The right to participate in favourable market movement

No obligation to exchange currencies giving full flexibility

Key risks

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

  • Should the contract no longer be required, the cost of unwind will be determined by the prevailing market rate at the time and be payable by the client
  • Non-refundable premium is payable upon purchase of a Vanilla Option within two days of execution
  • The mark to market value of the contract will become positive or negative throughout the duration of the contract in line with market fluctuations

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