• Foreign Exchange

Foreign Currency Exchange (or FX) involves the conversion of one currency into another currency at an agreed market FX rate. Most companies are exposed to the day-to-day volatility of the FX rate (i.e. the FX risk). This volatility directly and indirectly affects the cash flow, revenue, expenses, and overall financial statement of companies.

Every company strives to manage the impact of all risks, including FX risk. Identifying and managing the impact of FX volatility can only add value to the company. CIMB Bank has the expertise and a range of FX-risk management solutions to assist you in addressing your requirements toward managing your FX risk.

There are different approaches that companies typically take to address their FX risks. Some of these include:

  1. Do nothing
  2. Open a Foreign Currency Account (FCA)
  3. Cover (or hedge) your FX risk

DO NOTHING:
Only convert your foreign currency on the day of requirement, or within a day or two days of requirement. Unless your benchmark is the prevailing spot rate (see SPOT FX contract below), you will be exposed to daily FX volatility, which means you can be exposed to extreme movements in FX rates.

OPEN A FOREIGN CURRENCY ACCOUNT (FCA)
To debit or credit a foreign currency account without converting to local currency as and when payments are due or receipts are receivable. This method is useful when your net exposure is negligible.

COVER (OR HEDGE) YOUR FX RISK
Typically a Forward FX contract is used to hedge your FX exposure. Types of Forward FX contract used include an Outright Forward FX contract, an FX Option (or a Customised FX Forward) contract, and other derivatives. All FX contracts are agreements (obligations by both parties) to exchange a specified amount of one currency for another currency, as determined by the Forward FX rate/s for settlement on a pre-determined future (or forward) date, according to the terms of each contract.

SPOT FX contract

 

Tenure: Settlement date is up to 2 business days from the FX trade (or deal) date.

Outright FX Forward contract

Tenure: Settlement date is more than 2 business days (SPOT) and up to 1 year.

Long Term Forward FX contract (LTFX)

 

Tenure: Settlement date is more than 1 year.

FX Option (or Customised FX Forward) contract

An option is the right, or an obligation, to buy or sell a certain currency against another currency, at a predetermined (strike) price on a specific date in future.

A Customised FX Forward Contract provides a certain flexibility that is not available an Outright Forward contract.

Tenure: Settlement date is from 1 month to 1 year.

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