FX & Rates
FX spot transaction
All FX conversions where the financial settlement takes place on the second banking day (or FX value date) after the conclusion of the trade are spot transactions. The quotation of the spot transactions takes place based on the current interbank FX market and, accordingly, it may change very quickly (even every second). Naturally, the spot rate may differ (and generally does differ) from the official banking rate fixed for the given date since it is only a snapshot of the FX market in the morning.
FX forward conversion
Apart from the fact that foreign currencies can be sold and bought on the spot FX market (at spot rate), it is possible to conclude forward contracts for a specified future value date. Theoretically, if the future value date specified in the contract sets in, the forward conversion rates may tally with the current spot rate. However, practice shows that forward rates are almost always higher (premium) or lower (discount) than that. Premium and discount values are called swap points and these depend on the interest rates of the two foreign currencies, or are the differences thereof. The forward exchange rate is generated based on this when the swap points are added to the spot exchange rate:
forward rate = spot rate +/- swap points
FX swap transaction
A swap is an exchange rate transaction which means the spot sales/purchase of a given FX and the simultaneous forward purchase/sales of the same FX amount:
spot transaction + forward transaction = FX swap transaction
Options are bilateral transactions in which the buyer of the option obtains the right to buy (call option) or sell (put option) a specified FX amount at the contractual strike price on a defined future value date from/to the seller of the option (issuer of option). The buyer pays a specified premium to the seller for the purchase of the option upon the conclusion of the business.
By definition, the seller of the option always assumes the obligation to perform if the buyer of the option wants to exercise its rights.
Forward rate agreement
An FRA is a bilateral contract in which the parties agree in a fixed interest rate (forward interest rate) payable after a defined amount for a future period. In the case of an FRA the principal amount is not exchanged only the amount of the difference between the market interest rate (reference interest rate) valid at the time when the interest rate is defined and the interest rate (price) defined in the framework of the FRA projected onto the principal (settlement amount).
The forward interest rate transaction is the interest rate equivalent of the forward FX transaction since the interest rate fluctuations can be prevented with it. Based on this, the FRA can be bought (for borrowers against interest rate increases) or sold (for investors against the fall of interest rates).
Interest rate swaps (IRS)
An IRS is an agreement within the framework of which the two contracting parties exchange their FX interest payment liabilities throughout a defined period. Under the contract, only the interest rates move, the principal amounts don’t . It is possible that one of parties exchanges a fixed interest payment liability with a variable interest rate (coupon swap) or that two liabilities with variable interest rates but calculated based on different bases (e.g. USD prevailing interest rate and LIBOR) form the subject of the contract (basis swap).
Cross-currency interest rate swap (CCS)
A Cross Currency Swap (CCS) is an agreement within the framework of which the two contracting parties exchange their cash flows existing in different currencies throughout a defined period. As opposed to the interest rate swap, the principal is also exchanged.
A characteristic of the CCS is that at the beginning of the agreement, the principal amounts are exchanged at the current market price, and upon the expiry of the transaction they are redeemed at unchanged rates.
As opposed to a forward transaction, no premium or discount is connected to the spot rate. The liabilities derived from the various interest rate levels are actually realised parallel to the swap of the interest payments and not upon the conversion of the principal amount.
Traditionally, precious metals were primarily used for payment. In addition to their value-keeping function, they are widely used by various industries. Gold, silver, platinum and palladium have their own separate markets and our bank offers efficient exchange rate hedging solutions to fix the course of these precious metals.
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