What's your prediction on the Australian Dollar?

[cove]

Today we did a leveraged forward on the currency so we will get $250,000 USD at 0.7340 in January off a 0.7220 start. That was with Bell Potter.

 

[Quickstatus]

1:100 leverage?

 

[cove]

No we would get $750,000 at 0.7340 rather than $250,000 if the trading rate is above 0.7340 so I guess you could say a 3 : 1 leverage. The trade.was made when the currency hit 0.7220 for a moment yesterday.
No one knows where the currency will be in January so you get a risk premium for this.

 

[Quickstatus]

Sorry we might be talking about something different

What’s your exposure/margin?

 

[cove]

We have to take the $750,000 USD if at the final date in January 2019 has the currency above 0.7340. That is a risk but we use USD to pay for many items so it will get used.

 

[rock86]

Sorry we might be talking about something different

What’s your exposure/margin?

We deal with HSBC and the current forward margins their offering us, thanks to the higher fed reserve rate, for AUD/USD are

3m +1.8
6m +3.8
1y +31.8

 

[RAM]

We have to take the $750,000 USD if at the final date in January 2019 has the currency above 0.7340. That is a risk but we use USD to pay for many items so it will get used.

I just love spin doctors and financial engineering.

Without knowing a little more detail about the costs, dates and other specifics...

You have sold a USD put option with a slightly out of the money strike price (but I suspect you did not receive any premium for doing so) and as you have to take 3x the set amount, it is quite some premium. They have then used some of the premium you should have recieved to push the effective AUD/USD exchange rate higher. So the strike may have been 72.75 for example and the premium (3x .50 say) was part used (0.65 for you and .85 for them) to push the effective price to 73.40.

Now the twist, unlike you selling a straight forward put - where you receive the premium regardless of the outcome. Here you only receive it if at the exercise date the USD has weakened above 72.75 (plus the premium buffer the counterparty has allowed) of 0.65 so 73.40 (in my rough figuring). So - if it is between 72.75 and 73.40 the counterparty who set this up just closes the trade using part of the premium you would have recieved if you'd been given the transaction as a put option sale and pockets a .85 cent profit. If the USD does not weaken at all (in my figuring) they make 1.5cents (for no risk) and you get nothing for bearing all the 'risk'.

Regardless of whether you are happy or not to wear this risk (happy to lock in that exchange rate) - you are being spun. This stuff used to be tried on unsuspecting fund managers in the 80s and 90s (and new ones since then who haven't any knowledge of cashlfows and options). The names change (get repackaged by the spin doctors) but the outcome is the same - fee gouging at no risk for the seller.

There is a little more to it but not much. As the interest rate differentials now have the AUD strengthening against the USD - the AUD is priced in the forward market at a higher value - making it an easier sell.

With the recent plunge in the AUD - volatility has increased ... The put-call parity comes into play and voila - 'Binary options, knock-out options, leveraged forwards...'

Did you have to sign a derivatives risk understanding document by any chance or did they use the 'professional investor' exemption? Hopefuly you do not have to put up much of a margin (yet)?

 

[Quickstatus]

Sorry guys what I meant was the amount deposited in the margin account for the futures contract

 

[rock86]

Haha, I've completely missed the point, here you guys are talking about options and I chime in with forward contracts margins

 

[cove]

We buy currency to cover our trading so the risk is small when you buy 1.2 cents higher than the spot rate.

 

[RAM]

We buy currency to cover our trading so the risk is small when you buy 1.2 cents higher than the spot rate.

Yes risk is small but you are creating a nice profit for them which you could easily get yourself by simply approaching an intermediary and asking them what premium they would pay you for selling a USD put at 72.75 (for example).

I never like someone's hand in my pocket.

 

[cove]

We do that too.

 

[Quickstatus]

Ok so I’m not getting this. Back to basics:
What’s a leveraged forward contract compared to an Option?

 

[cove]

You can receive an option premium payment if you set the put option close to the market. The leveraged forward is usually to improve your currency holding position at a forward date. Both have risks as the $AUD can move the wrong way by a cent or two pretty quickly.
In January we will use the currency at 0.7340 and combine it with a cash settlement discount to achieve a higher effective currency deal on our goods we are buying.
I hope that doesn’t make it more confusing.

 

[Danger]

The dollar has experienced some fairly notable appreciations against some popular currencies in the past 10 or so days. Up against the USD, THB, MYR, INR and SGD, as well as the EUR and GBP I think.

 

[codash1099]

The dollar has experienced some fairly notable appreciations against some popular currencies in the past 10 or so days. Up against the USD, THB, MYR, INR and SGD, as well as the EUR and GBP I think.

Well of course it's going to rise. I just got back from a DONE4 with excess currency,

 

[Cossie]

Well of course it's going to rise. I just got back from a DONE4 with excess currency,

Sounds familiar!

 

[JohnM]

And I just made a massive $USD200 purchase on Tuesday. Just think how much ahead I'd be if I'd done it today .

Just need a few USD for backup in Sudan in a week. Best not overdo it .

 

[cove]

Well the $AUD had a strong couple of days but faded by Friday night. I think we got to 0.7299 for a minute or two and nw it is back from that peak. We are going ok against the Euro if anyone is thinking of buying a chateau.

 

[Teal747]

Well the $AUD had a strong couple of days but faded by Friday night. I think we got to 0.7299 for a minute or two and nw it is back from that peak. We are going ok against the Euro if anyone is thinking of buying a chateau.

I better rush in and buy this house I saw in Carmel CA then!