November 13, 2020
What is a PAR FORWARD?
A par forward is based on the same principles as a standard forward, i.e. a precisely defined amount is hedged by the fixed rate on the given date. It differs from standard forwards in that there is a possibility to make a series of multiple forwards with regular maturities.
The final rate for all forwards in a given par forward series is determined by the average time weighted forward points for each maturity. Such a rate is usually more advantageous for the client than the average rate of standard forwards.
What are the advantages of a PAR FORWARD?
In addition to the standard benefits of future exchange rate security, another benefit is the single exchange rate for all maturities. Therefore, the client does not receive a different forward rate for each maturity, as is the case with a series of standard forwards.
On the contrary, in the case of regular foreign direct debits, the client has the possibility to use one hedging product instead of individual forward trades.
We charge no fees for entering into a par forward.
Terms for concluding a PAR FORWARD:
- Signing of a Framework agreement about payment and investment services.
- You are legally obliged to have LEI number.
- Deposit of cash collateral or getting a Dealing limit.
- The minimum amount of the entire compound trade, i.e. one forward par session, is EUR 200.000 or the equivalent in another currency.
EXAMPLE
CLIENT EXPORTER:
The client anticipates payments from foreign customers, who will pay EUR 600.000 for goods delivered within the period of 12 months, i.e. by May 15, 2020, in regular quarterly payments. By concluding par forward contracts, the client gains in advance the certainty of a fixed exchange rate for which all four currency conversions will be gradually executed until the final payment date.
Date of accepted payment | May 15, | Aug 15, | Nov 15, | Feb 14, | May 15, |
Spot exchange rate EUR/CZK | 25,75 | ||||
Par forward agreed exchange rate |
| 26,01 | 26,01 | 26,01 | 26,01 |
Standard forward rate |
| 25,81 | 25,95 | 26,05 | 26,18 |
Accepted payment in EUR |
| 150.000 | 150.000 | 150.000 | 150.000 |
Any drawdown during the par forward term is for the originally negotiated forward rate and at no additional cost.
If a conversion transaction is not carried out / settled within a single forward due date on a predetermined settlement date, the settlement date may be postponed by a swap transaction to postpone the drawdown for an appropriate period. In such a case, the originally arranged partial forward trade will be re-evaluated and a new forward will be concluded based on the current market rates.
By entering into hedging operations, all entities providing such services incur exposures on the counterparty of such transactions. This engagement is covered in the following ways:
- Blocking of client funds
- Dealing limitem against financial reports
- Dealing limitem secured with a bill of exchange
- Dealing limitem secured with a property
If you are interested in this product and believe that you would use it as a convenient tool to reduce the risk associated with your business, please contact us.
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