Cooperative handling of forward settlement and sale of foreign exchange
The Bank’s cooperative forward foreign exchange sale and purchase means the business of foreign exchange settlement and sale in agreed currency and amount, upon expiry of agreed term, at exchange rate as specified in a forward exchange sale and purchase agreement among the three parties of the customer, Qishang Bank, and Industrial and Commercial Bank of China (or the Bank of China). There are 14 term grades of this business, namely 7 days, 20 days, 1 month, 2 months, 3-12 months. The transactions can be fixed-term or optional forward ones.
The product is applicable to state organs, enterprises, public institutions, social organizations, troops, foreign-invested enterprises and other corporate customers established in the People’s Republic of China (excluding Hong Kong, Macau and Taiwan) for satisfying their own demands and for hedging purposes.
(I) Main features of forward foreign exchange sale and purchase
1. Forward foreign exchange sale and purchase is the basic exchange rate derivative, which shows simple, clear and easily understood transaction structure.
2. Forward foreign exchange sale and purchase is a relatively mature product that a customer can use to avoid the exchange rate risk based on his/her expectations of future foreign exchange receipts and disbursements, and exchange rate market.
3. Forward foreign exchange sale and purchase can be easily combined with other products, whereby the customer can increase the return or reduce financial costs.
(II) Main advantages of cooperative forward foreign exchange sale and purchase
1. Rich Product Lines
Qishang Bank boasts leading ability in product R&D, design and risk management among China’s city commercial banks, which enables it to provide customers with a comprehensive package of forward foreign exchange settlement products, and to satisfy customers’ demands in all aspects.
2. Individualized Product Design
Qishang Bank has full advantages of a legal entity and fast response to give favorable quotations for foreign exchange settlement. Since it can facilitate the business operation with direct support from professionals in the treasury department of its head office, and combine various products, Qishang Bank can directly meet customers’ demand for operating cash flow with its cooperative forward foreign exchange sale and purchase.
In February 2017, an export enterprise knew it would receive a 20 million dollars payment for goods 3 months later. In order to hedge financial risks arising from two-way volatility of the exchange rate market, the customer settled a 3-month forward foreign exchange sale and purchase transaction of 20 million dollars with Qishang Bank, at the USD/RMB forward exchange rate of 6.95. The customer sold dollars and bought RMB at the agreed forward exchange rate of 6.95 when the transaction was due in May 2017.
If the USD/RMB spot rate is 6.93 on the expiry date, the customer will benefit from early exchange-rate hedging, saving financial costs of 400,000 yuan (20 million × (6.95-6.93) = 400,000). If the USD/RMB spot rate is 6.97 on the expiry date, the customer will bear the risk of exchange-rate hedging, incurring additional financial costs of 400,000 yuan (20 million × (6.917-6.95) = 400,000). However, the customer hedged the risk of exchange rate fluctuation through the forward foreign exchange sale and purchase transaction, which keeps the future cash flow stable, so that the effectiveness of financial cost management would not be affected.