Our Global Markets Team, backed by the HSBC Group, provides competitive, quality and customised foreign exchange products and services. Strong market making capabilities in spot, forwards, and non-deliverable forwards (NDFs), and swaps have made us one of the leading market makers globally, quoting competitive prices in all tradable currencies. The HSBC Group offers 24-hour dealing capabilities and is also a market maker in emerging market currencies.
A spot contract is a binding obligation to buy or sell a certain amount of foreign currency at the current market rate, for settlement in two business days time. To enter into a spot deal you advise us of the amount, both currencies involved and which currency you would like to buy or sell.
All companies who have foreign currency exposure may use spot deals, but a spot is most commonly used by companies exposed to transactional risk.
A spot deal will settle (in other words, the physical exchange of currencies) two working days after the deal is struck. This "value date" reflects both the need to arrange the transfer of funds and, in most cases, the time difference between the currency centres involved, one or other of which may well be closed at the time of the trade.
A Forward Exchange Contract (or forward contract) is a binding obligation to buy or sell a certain amount of foreign currency at a pre-agreed rate of exchange, on a specified date. To take out a forward contract you need to advise us of the amount, both currencies involved, the expiry date and whether you would like to buy or sell the currency on that expiry date.
A forward contract is the simplest method of covering exchange risk, without having to worry whether the spot market is going to move against you. This overcomes one of the problems that you can experience when importing or exporting in foreign currency, as it allows you to budget at a guaranteed rate of exchange.
The price of a forward contract is based on the spot rate at the time the deal is booked, with an adjustment which represents the interest rate differential between the two currencies concerned. For example, you need to buy British sterling in three months time. Say UK interest rates are higher than US interest rates. The pricing principle assumes that HSBC Cayman buys UK sterling now, paying for the sterling with dollars, in order to meet our obligation to you under the contract in three months’ time. We pass on to you the benefit of the higher rate of interest we earn on the sterling. The adjustment to the spot rate means that the forward contract rate would be more favourable than a spot deal rate. The reverse would apply if UK interest rates were lower than US rates.
HSBC Bank (Cayman) Limited is licensed to conduct investment business by the Cayman Islands Monetary Authority. This is not a recommendation, offer or solicitation to purchase or sell any security, commodity, currency or other instrument. The information provided herein does not consider specific objectives, circumstances or needs of individual recipients. The use of commodity or financial futures, foreign exchange contracts, investments and index contracts and options thereon involve special risks. Investors should be aware that the risk of loss from investing in these types of securities can be substantial and should therefore be able, financially and otherwise, to assume the risks of such transactions. Readers of this information should seek financial advice regarding the appropriateness of investing in any security, commodity, currency or derivative instrument or strategy contained herein.