Currency risk management

Forward Exchange Agreement

A client who wishes to fix the exchange rate of future currency denominated income or expense, should enter into a forward exchange agreement. The agreement stipulates date, rate and currency amount according to which the foreign exchange trade will be done in the future.

Example:
A European company is to receive US dollars in three months. It enters into a forward exchange agreement with Danske Markets. According to the agreement, the company agrees to sell the US dollars to Danske Markets in three months at today’s forward rate.


NDF

NDF is non-deliverable forward agreement. It is a forward exchange agreement especially for currencies which are not freely exchangeable. These currencies include e.g. South-American and Asian currencies like Brazilian real, Korean won and Chinese yuan. Market for NDF agreements is active in 20 currencies. NDF trade is settled at official fixing-rate of the currency, with no delivery of the currency.


Currency Option

Currency option is ideal for a client who wishes to hedge himself from adverse currency rate movements but benefit from favourable ones. The buyer of a currency option has the right but no obligation to buy or sell a currency at a predetermined date and rate.

The buyer of an option pays a premium to the option seller.

Example:
A European company is to receive US dollars in three months. It buys an option to sell the dollars to Danske Markets in three months. The company thus has the right to sell the dollars at a predetermined date at a predetermined rate to the option seller. On the exercise date the client compares the option rate to the current foreign exchange rate and sells the dollars at the more profitable rate.


Currency and Interest Rate Swap

Currency and interest rate swap suits the needs of a client who has a euro denominated liability and a foreign exchange denominated cash flow which it wishes to use to pay for the liability. The foreign exchange denominated cash flow may be generated by e.g. the foreign subsidiary of the company. Alternatively the client could have a foreign exchange denominated liability and a euro cash flow which it wishes to use to pay for the liability.

The currency and interest rate swap fixes the currency rate for interest payments, amortisations and notional exchanges. The interest rate of the agreement may be fixed or floating. If the interest rate is fixed, the agreement hedges both the currency and interest rate risk of the liability.