I. Introduction Customer acquires the right upon payment of an upfront fee to ICBC, to buy from or sell to ICBC a specific amount of a currency at a pre-agreed exchange rate on a specified date. Customer also has the right not to buy/sell.
ICBC FX option is a simple European option. Currently two types of options are available for customers: FX call options and FX put options.
II. Target Clients Domestic and overseas corporate clients that desire to hedge against currency fluctuation to preserve the value.
III. Functions and Features Customer uses FX options to hedge against exchange exposure and lock down the cost of buying foreign exchange. Customer gets the protection when the exchange rate does not move in favor, or does not miss the opportunity to gain from favorable movement in the exchange rate. To the customer, the risk is limited, the only loss is the option fee.
IV. Advantages 1. Competitive product pricing: In terms of exchange rate quotes, ICBC has a team of experienced and professional traders, product designers and quantitative analysts, flexible pricing mechanism and strong competitive advantages against the peers.
2. Tailored product design: Very flexible design, currency, tenor, settlement currency and amount can be set to serve the individual needs of customers.
3. Ongoing dynamic management: ICBC provides regular valuation report on the product, and dynamic management services in line with the market movement and customer requirement.
V. Price ICBC prices quoted to customers after all market factors taken into consideration, and updated in real-time in line with the market changes.
VI. Service Channel and Hours Eligible corporate clients are welcomed to apply within ICBC banking hours for corporate services at any sub-branch or tier-2 branch authorized to trade derivatives.
VII. Steps 1. Assess the customer: ICBC will make an overall assessment on the customer (business nature, experience in trading financial derivatives, internal management and control), and check the details of Customer Evaluation Form submitted by the customer.
2. Sign master agreement: Customer who applies for this service must sign related agreement with ICBC.
3. Sign confirmation: ICBC will make a statement on the risk involved (cash flow analysis, market value and factors, maximum cash flow). Customer must confirm in written and sign the confirmation letter.
4. Pay option fee: Customer must pay an option fee to ICBC at the start of the period.
VIII. Definition In the international market, the buying or selling of a FX option has three types if classified by exercising right:
1. European option: An option that only allows the buyer to exercise the right on the maturity date of the option.
2. American option: An option that the buyer can exercise the right any day during the validity period after closing.
3. Bermuda option: An option that can only be exercised on predetermined dates before the maturity date.
IX. Risk Warning In FX swap contacts, you are exposed to market risk where floating gain/loss is determined by the exchange rate fluctuations and interest rate fluctuations of different currencies. You should fully understand the terms and conditions in the agreement and make independent decision. Under no circumstance ICBC shall be liable for any loss due to force majeure or accidental events.
X. Examples Case I: Call option A customer has USD 1 million and needs to pay for import one month later in Japanese yen. To avoid the risk of yen appreciation, the customer buys a European option from ICBC to exchange dollar into yen for a period of one month with a principal of USD 1 million. Assume the pre-agreed exchange rate is JPY 94 for USD 1, then the company has the right to buy the agreed amount of yen at the rate of USD 1 to JPY 94 when the option matures. The company will not execute the option if the spot USD/JPY rate upon the maturity of the option is USD 1 to JPY 100, since the spot rate in the market is more favorable to buy yen. On the contrary, if the spot rate is USD 1 to JPY 90 when the option matures, the company can decide to exercise the right to ask ICBC to sell yen at the rate of USD 1 to JPY 90. In this case, the customer gains JPY 4 more for USD 1, and reduces the cost of buying yen.
Case II. Put option A customer has EUR 1 million and needs to pay for import one month later in US dollar. To avoid the risk of euro depreciation, the customer buys a European option from ICBC to exchange euro into US dollar for a period of one month with a principal of EUR 1 million. Assume the pre-agreed exchange rate is USD 1.3400 for EUR 1, then the company has the right to sell the agreed amount of euro at the rate of EUR 1 to USD 1.3400 to ICBC when the option matures. The company will not execute the option if the EUR/USD rate upon the maturity of the option is EUR 1 to USD 1.3450, since the spot rate in the market is more favorable to sell euro. On the contrary, if the spot rate is EUR 1 to USD 1.3350 when the option matures, the company can decide to exercise the right to ask ICBC to buy EUR 1 million at the rate of EUR 1 to USD 1.3400. In this case, the customer gains USD 0.0050 more for EUR 1, and earns higher return.
Note: Information herein is for reference only. Refer to the announcements and regulations of local outlets for further details. Industrial and Commercial Bank of China Limited reserves the final right of interpretation.