Definition of Forward Options

Forward Options

Britain exporter may decide to cover despite an uncertain payment date via a forward option. Forward market has the maturity period for making payment but forward option has no date of maturity.

Swap Deals

Another method of dealing with unspecified settlement date is by a swap deal. This method is virtually always cheaper than covering by way of forward options. A swap involves the simultaneous buying and selling of currency for different maturities. Swap deals used for forward cover are of two basic types: Forward/ Forward and Spot / Forward. In either case, the exporter begins by covering the foreign currency transaction forward to an arbitrarily selected but fixed date, just as in an ordinary fixed date forward contract. Then if the precise settlement date is subsequently agreed before the initial forward contract matures. The original settlement date may be extended to the exact date by a forward/ forward swap.

Short Term Borrowings

Short-term fixed rate borrowings or deposits is another technique for covering foreign-currency denominated receivables and payables respectively. Assume credit available to/by three to six months, it can be arranged an overdraft, discounting of bills, commercial papers is a corporate short-term, unsecured promissory note issued or a discount to yield business. The commercial papers maturity generally does not exceed 270 days.

Currency overdrafts and currency hold accounts simply use floating rate borrowing and depositing respectively, to achieve the same ends as under short-term borrowings or depositing with a fixed rate. The difference is clearly one of interest rate exposure. Floating rate borrowings or depositing clearly gives risk to an interest rate exposure, fixed rate finance does not.