Foreign Exchange

Foreign exchange is simply the exchange of one currency for another, but it can take many forms.
At Standard Chartered SME Banking, there are 2 ways of booking an exchange rate; either through Spot Rates or Forward Rates

Spot Rates

A spot contract is a binding obligation to buy or sell a certain amount of foreign currency at the current market rate, for settlement in two business days. To enter into a spot deal, you advise us of the amount, both currencies involved and which currency you would like to buy or sell.

Purpose
All companies that have foreign currency exposure may use a spot deal, but companies exposed to transactional risk most commonly use them.

Settlement
A spot deal will settle (in other words the physical exchange of currencies will take place) within two working days after the deal is struck. This 'value date' reflects both the need to arrange and transfer of funds and, in most cases, the time difference between the currency centres involved, one or other of which may well be closed at the time of the trade.

Summary
Forecasting exchange rates is very difficult - you cannot know for certain what the exchange rate is likely to be by the end of today, let alone a few months. A company using only the spot market for its foreign currency requirements, is using the simplest method, but at the same time the most risky. If you placed an order for raw materials from Canada for payment in three months, and use the spot market to meet the invoice when it falls due, your company could lose significantly if rates move against you over that three-month period.

Basic facts
Minimum deal size :	No minimum
Maximum deal size :	No maximum
Credit line :	Not required
Currency pairs :	In any currency pair where there is a liquid market

Forward Exchange Contracts

A forward exchange contract (or forward contract) is a binding obligation to buy or sell a certain amount of foreign currency at a pre-agreed rate of exchange, on or before a certain date. Contracts can be taken out for completion on an agreed date or at any point between two pre-agreed dates (up to three months apart). To take out a forward contract you need to advise us of the amount, the currencies involved, the expiry date and whether you would like to buy or sell the currency on the expiry date or anytime during a pre-agreed period.

Purpose
A forward contract is the simplest method that provides for exchange risk situations. This overcomes one of the problems that you can experience when importing or exporting in foreign currency, as you can now budget at a guaranteed rate of exchange.

Pricing
The price of a forward contract is based on the spot rate at the time the deal is booked, with an adjustment that represents the interest rate difference between the two currencies involved. For example, you need to buy US dollars in three months. Say US interest rates are higher than RM interest rates. The pricing principal assumes that SCB buys US dollars now, paying for the US dollars with Ringgit, in order to meet our obligation to you under the contract in three months.
We pass on to you the benefit of the higher rate of interest we earn on the dollars. The adjustment to the spot rate means that the forward contract rate would be more favourable than a spot deal rate. The reverse would apply if US interest rates were lower than RM rates.

Summary

A forward contract provides for situation of adverse movements in exchange rates against your
company.
You shall be meeting a budget rate for the transaction.
A forward contract is an obligation. Even if your requirements change over the term of the
forward contract, you are still obliged to deal.
A forward contract obliges you to deal at a specific rate - you are not in a position to benefit
from any favourable movements in exchange rates between booking the contract and
completing the deal.
No premium is payable.

Key facts
Minimum deal size :	No minimum
Maximum deal size :	No maximum
Period :	Usually a period of two years - longer periods are available in certain currencies
Credit line :	A credit line is required for forward contracts
Currency pairs :	In any currency pair where there is a liquid forward market

Click Business Account Rules & Regulations to learn more about the Terms and Conditions of the accounts.

For more information, contact your Relationship Manager or call SME Banking Hotline at
1300 888 111.