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Call us at 1636 or contact your manager.
Let us know your needs, together we will find best solution.
EXAMPLE. A company exports into Great Britain, gets income in GBP, but as the business is in Lithuania, it needs EUR: for paying salaries, rent for premises, etc.
As the GBP rate drops, the company’s income decreases along with its profit.
EXAMPLE. A company imports from the USA and/or Asian countries, pays for goods in USD, but generates income in EUR (sells goods and/or services in Lithuania).
As the USD rate rises, the company is to pay more for acquired raw materials/goods, their cost increases, whereas the profit decreases.
Company with a loan in a currency different from its income currency
EXAMPLE. A company generates income in EUR and RUB (sells goods in Lithuania and exports to Russia), has a loan in USD.
As the USD rate rises, the loan servicing becomes more expensive, the company’s expenses increase, whereas the profit drops.
FX forward rate is not determined by expectations for the future FX rates but by the factors like currency rate, transaction period and interest rates of particular currencies for transaction period. Let it be illustrated with FX forward rate formula:
F = S x (1+(P1 x T/B1))/ (1+(P2 x T/B2))
F – FX Forward rate
S – spot foreign exchange rate in the market
P1 – foreign currency interest rate for a certain period
P2 - base currency interest rate for a certain period
B1 - foreign currency day basis (360 or 365)
B2 - base currency day basis (360 or 365)
T – forward period (time to settlement date)
Before being able to do FX forward transactions:
Companies that need a certain currency for a short period
EXAMPLE. A company is short of USD in order to pay for goods, but it expects income in USD (the company exports to the CIS countries, imports from Asian countries). The company can make a currency swap for the period until the expected income in USD will arrive in order to effect a payment now. By doing the currency swap company avoids opening himself to the currency risk. Namely as an alternative he could just buy USD to his account via standard currency conversion and initiate the needed payment and later on as the sales income arrives, he could sell USD via currency conversion, but this would mean that in the meantime he has been open to the risk of currency rate fluctuations and might suffer loss due to the currency rate moves.
Companies that have a forward – in order to advance or postpone the transaction
EXAMPLE. A company calculated that it will need to purchase SEK at the beginning of March (3 March) and made a forward SEK purchase transaction. However, it turned out in February that the payment is due on 15 February – for this purpose it needs a currency swap, the first settlement date of which would be 15 February and the second date would be 3 March. In case of postponing a transaction, the first settlement date would be 3 March and the second date would be later.
Before being able to do FX swap transactions:
Companies participating in tender procedures
EXAMPLE. A company takes part in a tender procedure for contract work. Materials would be bought from Asian countries, they would be paid for in USD. As margins usually are not big in tender procedures, the USD rate fluctuation can determine whether a contract will be profitable. Thus, hedge against fluctuation guarantees profit. In case a bid is not successful, the company has a possibility to sell the option if the option has value or let the option expire worthless if it does not have any value left.
Companies for which it is important to assess the worst case scenario – having an option, the worst case is known in advance
Companies expecting to earn from foreign exchange rate fluctuations
EXAMPLE. A company thinks that SEK rate will grow, but a possibility of decrease cannot be excluded either. Then, in case of buying an option which gives the right to buy SEK the Client wins if SEK gets stronger. If SEK rate decreases, the Client’s loss is limited to the paid premium.
Various models can be used for calculation of the option price. One of the most popular is Black-Scholes model.
Currency option price or premium is affected by the following factors:
The price of the option grows as:
Before being able to do FX option transactions:
If the Client buys an option, no limit is necessary – the Client pays a premium on the transaction entry date and has no other obligations. On the contrary, it acquires the right to choose whether or not to perform the transaction. Standard settlement by paying a premium in the market is 2 business days after the entry into the transaction; if at the time of entry into the transaction the Client does not have funds in its bank account and chooses to pay in more than 2 business days, the Client needs a forward limit. If the Client wishes to sell an option to the Bank, a limit is necessary, as the Client gets an obligation to perform the transaction, meanwhile the Bank buys the right to choose whether or not to perform the transaction.
Possible loss of a currency option buyer is limited to the paid premium, whereas potential loss of the option seller is unlimited. Having in mind that the Client usually is an option buyer, its possibility to earn from the transaction is unlimited, whereas potential loss will not be more than the paid premium. In spite of that, the Client must admit that if on the transaction performance date the rate in the market is more favourable and it is not necessary to perform the option, it will face the situation where the option is kind of unnecessary for it, but the premium is already paid and non-refundable. Thus, an option should be treated as a method of hedging, but not a speculation.
The European Market Infrastructure Regulation (EMIR) is Regulation (EC) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, which stipulates settlement of derivative instruments via central counterparties and the obligation to inform the trade repositories thereof and the new procedures for the management of derivative instrument contracts.
The regulative changes resulting from EMIR have an impact on all counterparties within and outside the financial sector (except private persons) who operate on the market of derivative instruments. This is part of the global effort to increase the transparency of the market and to decrease operational and counterparty credit risks on the markets of derivative instruments.
EMIR contains three main additional requirements compared to the previous provisions:
All derivative trades must be reported to trade repositories from 12 February 2014. A trade repository is and entity that centrally collects details about derivative trades in a register to which financial regulators have access for supervision purposes.
The reporting obligation covers both over-the-counter (OTC) and exchange-traded derivative instruments. It is important to note that forward currency contracts are also covered by the reporting obligation set forth in EMIR.
The reporting obligation applies to all parties that are registered in an EU/EEA country (except private persons, central banks and some public bodies). Danske Bank also reports transactions on behalf of its clients if so agreed between the bank and the client. Danske Bank reports the transactions of its clients to DTCC GTR (the Depository Trust & Clearing Corporation – Global Trade Repository).
If the client has requested the reporting service and consents to the terms and conditions of the service, the client authorises Danske Bank to report transactions with derivative instruments made with the bank to the trade repository on its behalf. In order to do this the client must request an LEI (Legal Entity Identifier) and inform Danske Bank about this.
LEI (Legal Entity Identifier) is used globally to identify legal entities. It is a combination of 20 numbers and letters.
Requesting a LEI is subject to a fee (approx. USD 120 or €100) and it can take up to a couple of weeks.
See a list of all LEI providers here.
There are no authorised issuers in Lithuania at present. As such, you will need to apply via the website of an issuer stated above by setting up a user profile and submitting the required data.
LEI is short for Legal Entity Identifier and is a number that allows unique identification of investors across the EU. Everyone with a legal entity, such as a business with a CVR no., a sole proprietorship, an association or a foundation, must have an LEI from 2018 to be able to trade in securities or derivatives.
When it is possible to identify everyone trading in securities or derivatives in the EU, it is easier to monitor the market and prevent manipulation etc., and this makes the investment market more secure. If your business, association or foundation does not obtain an LEI by 3 January 2018 at the latest, it will no longer be possible for you to invest yourself or have Danske Bank invest on behalf of your business, association or foundation.
If you do not buy an LEI by 3 January 2018 at the latest, you may no longer trade in securities or derivatives.
It is easy to buy an LEI from any authorised provider, such as NordLEI at nordlei.org. An LEI costs about USD 120; EUR 100. Once you have bought the LEI, you must remember to renew it every year.
Please provide Danske Bank with your new LEI by sending it by email email@example.com.
No, you do not need to do anything. Just remember to renew your LEI every year.
Interest risk refers to the unpredictability of interest rate movements. Interest risk may increase Your expenses on loan repayments and decrease the income from Your assets.
In Danske Bank we can offer solutions that make it easy, simple and manageable to invest, whether you want to manage your investments or prefer to let our experts invest for you.
This is one of the most popular investment methods. Professional fund managers invest assets of many investors in bonds, stocks or other financial assets in various markets. The profit and risk depends on selected solution.