To take out an ARO contract, you need to advise us of the amount, the currencies involved, the expiry date and the worst rate which you would like to buy USD.
You also need to indicate the frequency at which you make payments as this frequency will help us to decide on what basis to which we will agree to calculate the average, ie weekly/monthly.
We will then advise you of the premium you need to pay.
This product is best explained with an example.
How an ARO works
For example, you import materials from the US, and have to pay a supplier USD100,000 per month for the next year.
You are looking to hedge the next year in full and seek protection at your budgeted rate of 1.7500.
You buy an ARO that protects against the average exchange rate for the year falling below 1.7500.
At the end of every month, as the payment is due, you buy USD100,000 in the spot market as required. At maturity, the strike (1.7500) of the ARO is compared with the average rate over the year based on the Bank of England fixing it at 11 am on each fixing day (represented by the black broken line).
If the average of the 12 monthly fixings is lower than the strike (protection) rate, HSBC will, at maturity, compensate you with a cash payment equal to the difference between the strike rate and the average rate over the period on your protected amount.
If, on the other hand, the average of the 12 monthly fixings is higher than the strike rate, then by dealing in the spot market, you will have been able to benefit from favourable currency rates over the year, and you will allow the option to lapse.
- Provides protection on 100 per cent of your exposure
- Allows you to benefit from favourable currency moves
- Flexible, in that you can decide the strike rate and the amounts at each fixing
- A premium is charged – this can be paid at any time during the life of the contract
- Available in any currency pair where there is a liquid forward market
Important: Please read the disclaimer carefully.