Question re: Forex Hedging

Hi All,

I got a question for anyone who can give me a hint.
My company singed a AUD/USD FX hedging last yr, saying we will buy USD tomorrow at 0.8532 however this rate is not attractive any more, so I want to either closeout the contract or extend for a further 3 months.

Wespac just told me I am able to extend this contract for 3 months however the cost of this will be approx. 66 forward points (subject to change depending on market movements). Because Australian interest rates are higher than U.S. interest rates the forward point calculations as a result are negative and ‘subtracted’ from the original rate.

My question arises as does bank always charge me for those basis points based on the rate I set initially with them or based on the spot rate? Do they charge every time whenever I extend the contract?

Thanks a lot.

densonzou said:

Hi All,

I got a question for anyone who can give me a hint.
My company singed a AUD/USD FX hedging last yr, saying we will buy USD tomorrow at 0.8532 however this rate is not attractive any more, so I want to either closeout the contract or extend for a further 3 months.

Wespac just told me I am able to extend this contract for 3 months however the cost of this will be approx. 66 forward points (subject to change depending on market movements). Because Australian interest rates are higher than U.S. interest rates the forward point calculations as a result are negative and ‘subtracted’ from the original rate.

My question arises as does bank always charge me for those basis points based on the rate I set initially with them or based on the spot rate? Do they charge every time whenever I extend the contract?

Thanks a lot.

Click to expand...

The forward points are based on the prevailing spot. If your position is closed tomorrow, you have already taken the mark to market hit and will convert to USD at 0.85532 when spot is around 0.9277 this second. All you are effectively doing is closing one FX forward for a loss and opening another with new terms. If you break a forward part way through its maturity, the prices are calculated with P&L taken on the existing one and new terms offered for the one to be opened. You might be able to save half the commission depending on your deal. Breaking an FFX is pretty normal for some market participants who are more financial participants rather than the hedgers.

The bank will charge commission and they will allow for forward points. Forward points are not a fee. It is the cost to the bank for hedging the risk that they have taken on, or otherwise the price which will prevail for laying off that risk into the markets. These are determined by the interest rate differentials payable/receivable by high quality banks in the different jurisdictions.

I have a currency risk i would like to hedge. Its the AUD/CNY. At the moment we still have a sum of money in China, partyl because its been so slow to get it out this time. For simplicity sake, lets say that its 100k Aud. If we want to lock in this current rate of 5.04 Rmb to AUD, as we expect the pair to continue its bullish rise until approximately 5.6, we should be able to buy the equivilant in of the pair AUD/CNY because in the future our losses from selling a more valuable CNY to buy AUD will be offset by our profit on the AUD/CNY trade, correct?

The issue we have with this are to make sure that we always have enough margin in the CFD account to cover a margin call before we can move the money in full. Are there any other issues here? Interest on the CFD account, etc.?

Here's a chart of the AUD/CNY.


There is also a risk in that this is the offshore rate...

How long are you hedging for ?

CanOz said:

I have a currency risk i would like to hedge. Its the AUD/CNY. At the moment we still have a sum of money in China, partyl because its been so slow to get it out this time. For simplicity sake, lets say that its 100k Aud. If we want to lock in this current rate of 5.04 Rmb to AUD, as we expect the pair to continue its bullish rise until approximately 5.6, we should be able to buy the equivilant in of the pair AUD/CNY because in the future our losses from selling a more valuable CNY to buy AUD will be offset by our profit on the AUD/CNY trade, correct?

The issue we have with this are to make sure that we always have enough margin in the CFD account to cover a margin call before we can move the money in full. Are there any other issues here? Interest on the CFD account, etc.?

Here's a chart of the AUD/CNY.


There is also a risk in that this is the offshore rate...

Click to expand...

fraa said:

How long are you hedging for ?

Click to expand...

Need 12 months...