Introduction
Foreign exchange option transaction refers to the buying and selling of a right. After paying a certain amount of option fees, the buyer has a right to exchange a particular currency at the agreed rate on a pre-determined settlement date in the future. In the mean time, the seller of right is also entitled to refuse to perform the above-mentioned transaction contract.
Features
1. If the payment for goods prescribed in the corporate import and export trade contract takes place on one day in the future, it's always expected to avoid the losses due to foreign exchange rate fluctuation on one hand, and to gain the benefits brought by foreign exchange rate fluctuation on the other hand. After paying a certain amount of option fees, customers shall have the right to buy an agreed amount of currency from the bank and sell another type of currency in accordance with the contracted foreign exchange rate at the specific time in the future, or to gain the earnings of option fees by putting the option on the trading date.
2. The buyer of foreign exchange option can choose a beneficial foreign exchange rate from the contracted exchange rate and the spot exchange rate upon maturity to conduct settlement, and the seller of foreign exchange option can gain the income from option fees at the beginning of the transaction. Bank of China can provide customers with option portfolio and "zero option fees" product to avoid foreign exchange rate risk, and also provide portfolio of options with different terms to meet customers' demands for term matching.
Term
A specific trading period is determined on the basis of customers' needs.
Target Customers
Customers who have the need to buy and sell foreign exchange option, and have opened foreign currency accounts in Bank of China.
Process
1. Agreement signing: before conducting option trading with Bank of China, customers need to sign the Master Agreement of Derivative Transactions.
2. Deposit implementation: in case the customer wants to put the option, customers engaging in such a product must have credit supports or provide a certain amount of cash as the security deposit to the customer relations department.
3. Inquiry: customers shall inquire from Bank of China about the price by providing all the details of option dealings in the form of written applications.
4. Completion of the transaction: once the transaction is concluded, Bank of China shall provide transaction confirmation to the customer.
5. Settlement: the option buyer shall pay the option fees to the option seller on the value date. If the buyer chooses actual settlement on the maturity date, the transaction shall be settled in line with the option terms. The customer can, if needed, require Bank of China to unwind the transaction during the trading period.
Cases
A company exported agricultural products to Japan, with the earnings in JPY. It was estimated that the company can guarantee the principal when the exchange ratio from JPY to USD was 118.00. The company anticipated that there would be a JPY income after three months and hoped to lock up the profits. But in case of JPY appreciation, the company could sell JPY in accordance with the market price. The business staff of Bank of China suggested the company could buy the JPY/USD forward foreign exchange option. After calling the option, the company had the right to sell JPY 1.45 billion at the ratio of 116.90 after three months. But if the market price was higher upon maturity, the company can give up the right. Since this right enables the company to gain benefits no matter the market price falls or rises, the company needs to pay the option fees of USD 130,000 to buy the right.
