clients who demand security for exchange rate risk resulting from possible negative development for the client of a specific currency pair
clients speculating on the development of a specific currency pair
Characteristics of the Forward Corridor:
The Forward Corridor allows the client to implement at zero initial cost a currency forward for an agreed nominal amount for a more advantageous exchange rate than usual.
The resulting exchange rate depends on:
the number of periods, in which the reference exchange rate was fixed at a value inside the band created by the Upper and Lower barrier
the Initial and Maximum exchange rate
The agreed initial exchange rate is disadvantageous from the point of view of the buyer.
The exchange rate improves over the duration of the transaction. Improvement in the exchange rate definitively ends at the moment when fixing is found outside of the band created by the Upper and Lower barrier, and continues again on subsequent fixing inside or on the level of the band's barriers.
The potential for profit or loss from transactions denominated in foreign currency is influenced by the movement of foreign exchange rates.
Theoretically, neither profit nor loss is limited in any way.
In the case of the Forward Corridor, the client does not know the exchange rate subject to which the nominal amount will be exchanged until the maturity date.
The resulting exchange rate could be found anywhere between the disadvantageous (for the client) Initial and advantageous Maximum exchange rate
This rate depends on the number of periods in which the reference exchange rate was fixed at a value in the band created by the Upper and Lower barrier, to the total number of periods.
A client (EUR exporter) sells EUR/buys CZK. Settlement of the transaction is one year from the date it is concluded.
The current market annual forward rate is 29.950.
The transaction nominal is EUR 1,000,000.
The initial exchange rate is 29.850, the Maximum exchange rate is 30.200.
The Lower barrier has a value of 29.500, the Upper barrier has a value of 30.500.
Fixation of the exchange rate takes place on a daily basis, only on business days (not at weekends and on public holidays), i.e. 250 fixations. The aliquot nominal amount is thus 1,000,000 / 250 = EUR 4,000.
Let us assume that until maturity, fixing was found 100x between the Lower and Upper barriers.
The resulting exchange rate is thus 29.850 + (30.200 – 29.850) x 100 / 250 = 29.990.
Advantages of a Forward Corridor:
zero initial costs
execution of exchange forwards at a substantially better rate
Forward Corridor can be arranged in all currencies stated on the Komerční banka exchange list
the transaction is always concluded by telephone with a Client transaction dealer
the client receives confirmation of the concluded transaction containing the agreed parameters of the transaction
at Komerční banka, a team of experienced professionals is at your disposal; they will propose an optimum strategy and are able to respond flexibly to developments on the market
A Forward Corridor allows you to:
appreciate your available funds highly advantageously with zero initial costs