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Mark-to-Market Forward

A product to secure currency risk.

A Mark-to-Market Forward is intended for:

  • natural persons – entrepreneurs
  • corporate entities
  • Czech nationals and foreigners
  • clients who demand security for exchange rate risk resulting from possible negative development for the client of a specific currency pair
  • clients who speculate on the development of a specific currency pair

Characteristics of a Mark-to-Market Forward:

  • This product allows the client to secure himself or herselfagainst exchange rate risk and to limit the maximum risk of negative revaluation in the event of inauspicious development.
  • The parties to the transaction agree on a forward exchange rate and on a rate limiting the maximum risk of negative revaluation..

Risk

  • The potential for profit or loss from transactions denominated in foreign currency is influenced by the movement of foreign exchange rates.
  • Purchase of the product involves a lower risk than sale.
  • The maximum loss when buying the product is limited by the difference between the market reference forward rate and the agreed forward rate.
  • When selling the product, the risk is significantly higher, the seller's loss could be significantly higher than the difference between the market reference forward rate and the agreed forward rate received; the risk is unlimited.
Example

A client (EUR exporter) sells EUR/buys CZK and is exposed to the risk of weakening of the EUR.
For this reason, he or she enters into an obligation to sell EUR for the agreed exchange rate.
However, the client also wants to be protected in a situation when the EUR dramatically strengthens.

Transaction date: 17.07.09
Transaction nominal: EUR 1,000,000
Expiry date: 17.07.10
Settlement date: 21.07.10
Forward rate: 25.600
Limit Strike: 28.160
Reference forward rate: 26.050

Payout alternatives on the expiry date:

  • The client arranges security in the form of a Mark-to-Market Forward to limit loss from market revaluation to the difference between the Limit Strike and the Forward rate.
  • The currency exchange rate is fixed on the expiry date and the value is compared with the Limit Strike. The results determine the final FX rate.
  • If the current fixing is located below the agreed Forward rate, the client profits from market revaluation.
  • If the current fixing is located above the agreed Forward rate, the client's maximum loss is given by the difference between the Limit Strike and the Forward rate.
  • If the current fixing ≤ Limit Strike, the client sells EUR for the Forward rate, the option is not exercised, and thus:
    • the resulting FX rate = Forward rate;
  • If the current fixing > Limit Strike, the client sells EUR for the Forward rate, but the option is exercised and the client's rate improves (increases) by the difference between the current fixing and the value of the Limit Strike, and thus:
    • the resulting FX rate = Forward rate + (current fixing – Limit Strike)

For a better idea, we also provide a diagram showing the Mark-to-Market Forward settlement options.

Payout alternatives on the Expiry date

Advantages of a Mark-to-Market Forward concluded at Komerční banka:

  • a Mark-to-Market Forward  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, you have a team of experienced professionals at your disposal; they will propose an optimal strategy and are able to respond flexibly to developments on the market

A Mark-to-Market Forward allows you to:

  • appreciate your available funds on the currency market and profit from positive exchange rate developments 

How to get a Mark-to-Market Forward?

  • contact your relationship manager
  • call the toll-free KB Info line on 800 521 521

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