Geistesblitz 01/19

Initial Situation

• EUR-GBP spot rate: 0.8960 GBP/EUR
  
• EUR-GBP forward (12.01.2022): 0.9360 GBP/EUR
  
• Ø EUR-GBP forward (10.01.20202  12.01.2022): 0.9240 GBP/EUR

Multi-EUR-GBP hedge with limited minimum rate

In return, the client is committed to make a payment if the spot price at the end of a 12 month-period falls below 0.8700 GBP /EUR. The minimum rate is only valid to a limited extent:

• The minimum rate is partial: In the first year it affects 33% of the hedging volume and in the second and third year 67% and 100% of the hedging volume respectively.
• The minimum price is conditional: It is cancelled completely, if the EUR-GBP rate is determined at least once at or above the maximum rate (continuously in 24-hour trading).

• Notional of maximum rate: i.e. 2.000 mio GBP p.a. (in total 6.000 mio GBP)
  
• Notional of minimum rate: i.e. 0.660 mio GBP p.a. in year 1, 1.340 mio GBP in year 2 and 2.000 mio GBP in year 3 (in total 4.000 mio GBP)
  
• Value dates: Annually over a period of three years (16.01.2020, 19.01.2021, 19.01.2022)
  
• Expiry dates: For the maximum rate daily fixing, calculation of the average rate at the end of the year. For the minimum rate at the end of the year. (14.01.2020, 15.01.2021, 14.01.2022)
  
• Maximum Rate: 1.0000 GBP/EUR
  
• Minimum Rate: 0.8700 GBP/EUR Knock-Out Condition: The minimum rate shall not apply, if the price threshold is reached or exceeded at least once during the term of the contract. Barrier: 1.0000 GBP/EUR 

• Securing a maximum average rate of 1.0000 GBP/EUR for GBP sales over the next 3 years without paying a premium.
• The minimum rate is only effective for a reduced notional.
• The minimum rate does not apply in the event of an increase of the spot rate to or above 1.0000 GBP/EUR.

Risks:

• For a part of the notional the customer commits to a minimum rate of 0.8700 GBP/EUR.
• The maximum average rate of 1.0000 GBP/EUR significantly exceeds the average forward rate of GBP 0.9240/EUR.

In a nutshell

With the Geistesblitz ‘multi-EUR-GBP hedge with limited minimum rate’ exporters to the United Kingdom have a strategy at hand to be prepared in case of significant spot shifts in the medium term following a potential disorderly Brexit. In return, the customer commits to a minimum rate for a lower notional amount, that accounts for the uncertainty of sales and hedging volumes. The minimum rate does not apply in the event of a significant – possibly only temporary – shift of the EUR-GBP spot rate.