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I. Description
Unilaterally-terminated forward foreign exchange means the customer and ICBC sign a forward foreign exchange contract, specifying that it will conduct one or more foreign exchange transactions with ICBC. In addition, delivery date, currency, transaction direction, delivery exchange rate and transaction amount of each foreign exchange trading should be specified in advance. Meanwhile, both parties set forth an automatic transaction termination provision. Once the automatic transaction termination provision is met, the designated transaction will be terminated automatically. The automatic transaction termination provision involves three parts: exchange rate indicators (such as spot exchange rate), termination level and transaction termination scope.
II. Target Customers
It is applicable to corporate customers that need to avert exchange rate fluctuation risk for the purpose of hedging, and intend to conduct forward transactions to manage exchange rate risk and thus obtain better forward exchange rate.
III. Functional Features
The product is an off-exchange derivative with termination conditions, simple structure and flexible elements. It can be tailor-made for customers that don’t need to make payment at an early stage. Customers may avert market risk of exchange rate fluctuation through the product, and can conduct transactions at the exchange rate better than that of ordinary forward to reduce corporate foreign exchange purchase cost.
IV. Features and Advantages
1. Competitive product quotation: ICBC can offer better product quotation thanks to its professional and experienced traders and product design and quantitative analysis teams, flexible pricing mechanism and strong competitiveness.
2. Customized product design: flexible design of unilaterally-terminated forward foreign exchange can meet diversified needs of customers and help reduce or lock foreign change purchase cost.
3. Continuous dynamic management: ICBC can regularly provide customers with evaluation reports on unilaterally-terminated forward foreign exchange, and provide subsequent dynamic management services according to market quotations and customers’ demands.
V. Price
ICBC provide quotation to customers after consideration of market factors, and make real-time updates based on market changes.
VI. Service Channels and Hours
Corporate customers meeting access conditions may apply to sub-branches or tier-2 branches with the derivative business operation right during trading hours for corporate business.
VII. Application Process
1. Customer assessment: ICBC carries out due diligence of the customer, comprehensively assesses it based on its business, financial derivative trading experience and internal management & control, and recommends suitable product varieties to it.
2. Signing the master agreement: to apply for unilaterally-terminated forward foreign exchange, customers need to sign relevant business agreements with ICBC.
3. Implementing guarantee measures: customers need to pay security deposit or hand over collateral or may apply for occupying special credit limit of derivative transaction.
4. Risk disclosure and confirmation signing: ICBC gives risk warning to customers in terms of cash flow analysis, market capitalization, influence factors and potential market capitalization loss. Customers needs to confirm risk warning in writing and sign the confirmation.
VIII. Definitions
The automatic transaction termination provision contains the following two elements:
1. Observation of exchange rate indicator
(1) Continuously observe the exchange rate, i.e., as long as the indicator reaches the termination level at any time point during the agreed observation period, the automatic transaction termination provision will take effect.
(2) Observe the exchange rate at one point, i.e., only observe set values at a particular time point on the agreed observation day. Only such set value reaches the termination level will the provision take effect.
2. Transaction termination scope
Unilaterally-terminated forward foreign exchange is generally delivered multiple times during a certain period of time. When the automatic transaction termination provision comes into force, the customer may make a choice regarding the termination scope:
(1) Only termination the foreign exchange delivery of the current period.
(2) Terminate all agreed foreign exchange deliveries within the current period and thereafter.
The above-mentioned elements can be combined to produce four different structures.
As a customer-driven risk management product of exchange rate, the unilaterally-terminated forward foreign exchange may be flexibly designed based on the customer’s needs as well as product period, delivery frequency, delivery amount and termination level.
IX. Risk Prompt
Risks that the customer may face: the exchange rate on the delivery day is inferior to spot exchange rate; the product reaches the set level early, leading to inadequate hedging; market capitalization is assessed to make profits or suffer losses; the worse market capitalization assessment result requires additional security deposit; and reversed squaring may incur additional fees. Customers shall completely understand every article in the agreement and make independent decision based on their own judgment. Customers shall take into account force majeure and possible accidents, losses arising from which have nothing to do with ICBC.
X. Business Case
Business background: some corporate customer has USD income and is expected to make JPY spending one year later.
Customer need: hope to avert JPY appreciation risk, lock financial cost and intend to conduct forward foreign exchange business to early lock exchange rate risk. The one-year forward USD/JPY exchange rate is 83.23. The customer regards current JPY price as too high, it hopes to buy JPY at a lower price to reduce foreign change purchase cost. The customer tracks JPY exchange rate trends for a long time and has certain perception of foreign exchange market, exchange rate-related derivative structure and potential risk.
Solution: the customer may conduct unilaterally-terminated forward foreign exchange transaction (one year) with ICBC. Agreement between two parties: the exchange rate indicator refers to the spot USD/JPY exchange rate, with the termination level of 75. During the observation period before the delivery day, if the spot exchange rate has never been lower than 75, ICBC undertakes to sell JPY to the customer at the rate of USD1:JPY88.82 at the maturity. If it was ever lower than 75, the agreed foreign exchange delivery will be canceled (spot rate: USD1:JPY83.77).
XI. Notes
Minimum amount of such transaction is USD2 million or equivalent. The shortest term is 3 months (delivery once every month).
Note: the information provided on the page is for reference only. Specific businesses are subject to announcements and rules of local outlets.
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