Narrative
A German exporter is expecting to receive USD 100,000 in mid-March 2009. At the time when it decides to hedge the transaction, on 26 November 2009, the spot rate is 0.9246 EUR/USD. Due to the uncertainty relative to the rate in the future, the exporter decides to hedge the transaction to secure the future EUR amount. Feeling that the price of the dollar might go down, the German exporter decides to buy a put option, that is, acquires the right, but not the obligation, to sell USD against EUR at a predetermined price.
The German exporter buys, on 26 November 2008, a USD 100,000 OTC (over-the-counter) put option from Dresdner Bank, Frankfurt, at a strike price of 0.9446 expiring on 17 March 2009 at 4.00 p.m.
In turn, to hedge its now open option position, Dresdner Bank, Frankfurt, buys, on the same day a EUR/USD put from Citibank, New York, for the same underlying amount of USD 100,000. In this way, Dresdner Bank, Frankfurt, limits the profits or losses to the purchase price of the option. The premium price of the EUR/USD put purchased by Dresdner Bank, Frankfurt, is equal to 2.25% of the underlying currency and amount. The deal expiring on 17 March 2009 has a strike price of 0.9346.
Information Flow
Message 1: SWIFT Message from Dresdner Bank, Frankfurt
 Explanation |
Format |
|---|---|
| Sender |
|
| Message Type |
|
| Receiver |
|
| Message Text |
|
| General Information |
|
| Transaction Reference Number |
|
| Related Reference |
|
| Code/Common Reference |
|
| Further Identification
(1) |
|
| Date Contract Agreed |
|
| Party A |
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| Party B |
|
| Expiry Details |
|
| Final Settlement Date |
|
| Settlement Type |
|
| Underlying Currency and Amount |
|
| Strike Price |
|
| Counter Currency and Amount |
|
| Premium Price |
|
| Premium Payment
(2) |
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| Account With Institution |
|
| End of Message Text/Trailer |
|
(1) Specifies, from the Sender's point of view, whether the option is bought or sold, put or call, indicates the style and the underlying currency.
(2) The letter option indicates, from the Sender's point of view, the direction of the premium payment. It consists of the value date, the currency code and the amount of the premium payment.
Message 2: SWIFT Message from Citibank, New York
| Explanation |
Format |
|---|---|
| Sender |
|
| Message Type |
|
| Receiver |
|
| Message Text |
|
| General Information |
|
| Transaction Reference Number |
|
| Related Reference |
|
| Code/Common Reference |
|
| Further Identification
(1) |
|
| Date Contract Agreed |
|
| Party A |
|
| Party B |
|
| Expiry Details |
|
| Final Settlement Date |
|
| Settlement Type |
|
| Underlying Currency and Amount |
|
| Strike Price |
|
| Counter Currency and Amount |
|
| Premium Price |
|
| Premium Payment
(2) |
|
| Account With Institution |
|
| End of Message Text/Trailer |
|
(1) Specifies, from the Sender's point of view, whether the option is bought or sold, put or call, indicates the style and the underlying currency.
(2) The letter option indicates, from the Sender's point of view, the direction of the premium payment. It consists of the value date, the currency code and the amount of the premium payment.
Message 3: Statement of Account from Citibank, New York
On 28 November 2008, Citibank, New York, debits the account of Dresdner Bank AG, Frankfurt with the premium amount.
This transaction will appear as follows in the statement of account (MT 950):
:61:081128D2250,S305CITI339346DRESFF//FOR17864
Narrative
Based on the previous example, it will be assumed that the EUR/USD spot rate is 0.9140 on 17 March 2009. Thus, Dresdner Bank AG, Frankfurt, will exercise the put option it bought. This is the case since it can make a profit from exercising the option, that is, selling USD at 0.9346 and buying the USD in the market at 0.9140.
To confirm the settlement of the exercise of the foreign currency option, Dresdner Bank AG, Frankfurt, and Citibank, New York, exchange MT 300 Foreign Exchange Confirmations.
Dresdner Bank, Frankfurt, and Citibank, New York, service accounts for each other in the currencies of the contract. At maturity, these accounts will be debited for the amounts of the contract.
Information Flow
Message 1: SWIFT Message from Dresdner Bank, Frankfurt
| Explanation |
Format |
|---|---|
| Sender |
|
| Message Type |
|
| Receiver |
|
| Message text |
|
| General Information |
|
| Sender's Reference |
|
| Related Reference |
|
| Type of Operation |
|
| Common Reference
(1) |
|
| Transaction Details |
|
| Trade Date |
|
| Value Date |
|
| Exchange Rate |
|
| Currency/Amount |
|
| Receiving Agent
(2) |
|
| Currency/Amount |
|
| Receiving Agent
(3) |
|
| End of message text/trailer |
|
(1) When exercised by the buyer, an MT 300 may be used to confirm the settlement of the exercise of the foreign currency option, using code EXOP in field 22A.
(2) The financial institution where the Sender wishes to receive the funds specified in field 32B.
(3) The financial institution where the Sender will transfer the funds specified in field 33B.
Message 2: SWIFT Message from Citibank, New York
| Explanation |
Format |
|---|---|
| Sender |
|
| Message Type |
|
| Receiver |
|
| Message Text |
|
| General Information |
|
| Sender's Reference |
|
| Related Reference |
|
| Type of Operation |
|
| Common Reference
(1) |
|
| Transaction Details |
|
| Trade Date |
|
| Value Date |
|
| Exchange Rate |
|
| Currency/Amount |
|
| Receiving Agent
(2) |
|
| Currency/Amount |
|
| Receiving Agent
(3) |
|
| End of message text/trailer |
|
(1) When exercised by the buyer, an MT 300 may be used to confirm the settlement of the exercise of the foreign currency option, using code EXOP in field 22A.
(2) The financial institution where the Sender wishes to receive the funds specified in field 32B.
(3) The financial institution where the Sender will transfer the funds specified in field 33B.
Message 3: Statement of Account from Dresdner Bank, Frankfurt
On 19 March 2009, Dresdner Bank, Frankfurt, debits the EUR account it services for Citibank, New York, with the funds.
This transaction will appear as follows on the statement of account (MT 950):
:61:090319D93460,0075S300CITI339346DRESFF//FX7456
Message 4: Statement of Account from Citybank, New York
On 19 March 2009, Citibank, New York, debits the account it services for Dresdner Bank, Frankfurt, with the funds.
This transaction will appear as follows on the statement of account (MT 950):
:61:090319D100000,S300CITI339346DRESFF//FOR5775
