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Companies active on international markets operate in an open global economy where everything is interconnected. Events that take place in the international financial and monetary markets may have a major impact on your business.

The substantial fluctuations of foreign currencies against the euro have rekindled awareness of the exchange risks among many business leaders. Foreign exchange rates directly affect:

• Commodity Prices
• Value of foreign investments and sales
• Competitiveness of your business on domestic and foreign markets

But it’s not just exchange rates that are affected. Interest rates also have an impact on the value and profits of your business.

If you have a very small gross margin business, it’s extremely important to limit the effect of currency fluctuations through hedging. KBC Brussels is your ideal partner for this. We’ll thoroughly analyse the risks you might be exposed to and develop appropriate financial instruments to ensure those risks are properly managed. This will give you the freedom you need to do business in an international economy.

With spot or cash transactions, payments are settled two working days after the transaction is concluded, so the value date is T+2. If settlement has to be sooner than T+2, such as the day of the transaction (T) or the next business day (T+1), the price has to be adjusted based on the interest rate spread between the two currencies for the given term.

Spot value dates and spot exchange rates are used for most currency pairs. The standard value date for spot (cash) transactions is T+2. Some currencies are settled T+1 like the Canadian dollar and the rouble.

You can execute cash transactions using Go&Deal Pro. Contact our Corporate Sales desk on + 32 2 417 28 09 for more details and help.
 

Transactions to be carried out in the future are called forward transactions or outright transactions. These are transactions with a value date beyond two business days (T+2). When you enter into a forward contract, the spot price has to be adjusted based on the interest rate spread between the two currencies for the given term.

Where the interest rate for the counter currency is higher than that of the main currency, basis points are added to the spot price. This is called a premium. The opposite is called a discount, where base points are deducted from the spot price.

Forward rate = spot rate + swap points

Example

Suppose you want to purchase 500,000 US dollars in three months’ time (90 days) and to pay for this in euros. The bank wants to hedge that risk itself and immediately invests in US dollars, so that the amount plus interest over those three months will amount to 500,000 US dollars.
In order to make that investment, the bank first takes out a loan in euros.

That amount is then converted at a spot rate to an investment in US dollars. On the expiry date, 500,000 US dollars is placed against the amount borrowed and the interest payable in order to determine the forward rate. This is illustrated by the calculation below.

In order to be able to give you 500,000 US dollars in 90 days’ time, the bank must now invest 498,132 US dollars at an interest rate of 1.5%. At a spot rate of 1.30, it has to borrow 383 178.47 euros for this purpose. On account of the euro interest rate of 1%, the bank ultimately has to repay 384 136.41 euros. The forward rate is therefore 500,000 US dollars / 384,136.41 euros = 1.30162

You can enter into forward foreign exchange contracts using Go&Deal Pro. Contact our Corporate Sales desk on + 32 2 417 28 09 for more details and help.
 

A foreign exchange swap transaction is a combination of a spot transaction and a reverse forward transaction. The parties involved exchange an amount in one currency for an amount in another currency and agree to reverse this transaction again after a certain period of time.

Businesses use foreign currency swaps to manage their cash flows. Swaps can be useful in a number of situations.

Some examples

• Deferring payment of invoices requiring foreign currency purchases to sell back the foreign currency on the original contract date and buy back the foreign currency on the new contract date
• Obtaining temporarily required US dollars for your business with a positive euro account balance by buying (rather than borrowing) the amount in US dollars with the proceeds from selling euros today (perhaps converting the amount in US dollars back into euros at a later date)

You can execute currency swaps using Go&Deal Pro. Contact our Corporate Sales team on + 32 2 417 28 09 for more details and help.

If you want the certainty of a guaranteed minimum or maximum rate while still benefiting from favourable exchange rate movements, currency options are worth considering.

They give buyers the right to buy (call) or sell (put) an agreed amount in a particular currency at an agreed exchange rate either on (European style) or until (American style) a specified date.

If the buyer of a currency option exercises their right, the seller (or writer) of the currency option must deliver (call) or sell (put) the amount in the agreed currency and at the previously determined exchange rate. In order to obtain that right, the buyer of the currency option pays the seller a premium.

A currency option therefore offers a major advantage in relation to a forward contract in that you can follow favourable price developments and avoid negative ones. Buyers do, however, have to pay sellers a premium for this extra advantage. That premium depends in particular on the term of the option, the protection level (= the rate at which the option can be exercised) and of course the amount of the exposure.

Since the exchange rate always indicates the relationship between two currencies, a call in one of those currencies is necessarily a put in the other. The right to buy euros against dollars at an agreed rate is also the right to sell dollars against euros at the same price.

A European-style option can only be exercised on the expiry date, while an American-style option can be exercised on any business day up to and including the expiry date. When an option is exercised, the currencies will be exchanged on the value date, i.e. two business days later.

Contact our Corporate Sales desk on + 32 2 417 28 09 for more help with currency options, which can’t be traded using Go&Deal Pro.

The bid (less commonly: bid rate or bid price) is the rate at which a bank is prepared to buy securities, currencies or other tradable products from a counterparty seller.

The offer or ask price is the price at which a bank is prepared to sell securities, currencies or other tradable products to a counterparty buyer.

The bid-offer spread is the difference between the prices at which securities, currencies or other tradable products can be bought and sold. Depending on the market’s liquidity, this spread can be wider (low liquidity) or narrower (high liquidity).

The value date of a transaction is the date on which the transaction is settled.

LEI stands for Legal Entity Identifier. Every legal entity on the financial market must apply for an LEI. This unique code boosts financial market transparency and risk management and lets us meet reporting obligations.

An LEI costs 89 euros excluding VAT and is valid for one year. These are the current LEI providers in Belgium:

• Xerius
• GS1
• Acerta