I. Business Description During the forward FX transaction, the customer signs the forward FX transaction agreement with ICBC, agreeing to settle the funds based on the specified currency, amounts, exchange rate and maturity on a day in the future. The product is relatively mature financial product. It has simple and easy-to-understand transaction structure, and is free from the transaction charges such as option fees and service fees etc. The product may help the customer to lock up the exchange rate of the future FX transactions in advance, eliminate the exchange rate risk, and avoid the potential losses arising from fluctuation of the exchange rate.
II. Target Customers It is applicable to the corporate customers such as governmental agencies, corporate and public institutions, social organizations, armies or foreign invested enterprises etc, that are established within the territory of the People’s Republic of China (excluding Hong Kong, Macau and Taiwan) and have the needs of hedging or investment.
III. Features and Advantages i. Excellent pricing power: ICBC has many trade systems including the internationally advanced Dealing 3000, and is able to trade through the international inter-bank foreign exchange market and the internationally top-notch foreign exchange market makers to offer a preferential price for the customers. Meanwhile, ICBC has professional foreign exchange traders, which can calculate the futures price for the customers by running the models. ii. Individualized product designing: the product of ICBC supports the forward transactions of a large number of currencies such as US dollar, Japanese yen, Euro, British pound, Australian dollar, Singaporean dollar, Canadian dollar and New Zealand dollar on different terms such as one month, three months and six months etc. ICBC can also design the products based on individualized needs of the customer.
IV. Case Illustration In February 2011, an enterprise expected to receive a sum of US dollar income in the upcoming month. In order to avoid the exchange rate risk, it conducted a forward FX transaction in an amount of 20 million euros with ICBC, agreeing to sell the euros to buy US dollar at a forward exchange rate of 1.40 one month later. In March 2011 when the product matured, the customer normally delivered the transaction with ICBC. The then spot exchange rate of euro relative to US dollar was 1.36. The customer delivered the transaction based on the exchange rate (1.4) specified in the agreement, and gained USD800,000 (2000*1.4-2000*1.36) more than the transaction on the spot exchange rate. Through the transaction, the customer locked up the risk of exchange rate fluctuation in advance.
V. Conditions for Application 1. Credit rating at A or above; 2. Real background of demand; 3. Qualified or authorized to conduct the derivatives trade; 4. Understand the risks of derivative trade and willing to assume potential losses; 5. Without bad credit record at banks or other significant bad records; 6. Being granted a special credit limit for the derivatives trade by ICBC; 7. Opening a basic deposit account or a general deposit account with ICBC. For the customers that provide full guarantee or other low-risk guarantees, requirements on the abovementioned credit ratings and credit limit can be loosened.
VI. Sign-up The customer shall sign the Agency Risk Management Business Agreement of Industrial and Commercial Bank of China Limited with ICBC before applying for this business.
VII. Service Channel and Time The eligible customers shall apply for handling the forward FX transaction business to tier-1 or tier-2 branches with the forward FX transaction business rights during the office hour.
VIII. Operation Guide 1. Application: the customer shall submit the Power of Attorney on Foreign Exchange Transactions to ICBC, so that ICBC could examine the credit standing and performance ability of the customer. 2. Fulfillment of the guarantee measures: the customer shall pay the margin deposits or fulfill other guarantee measures. 3. Knockdown: after a deal is knocked down, ICBC will issue the transaction confirmation letter to the customer. 4. Cancellation and alternation: prior to completion of the entrusted transaction, the customer may alter or cancel the transaction entrustment. Once the entrusted transaction is completed, the customer shall not alter or cancel it.
IX. Definitions 1. Premium: premium refers to the condition that the futures exchange rate of a currency in the foreign exchange market is higher than its spot exchange rate. For instance, the spot exchange rate of euro relative to US dollar in the foreign exchange trade market is 1.33, while the three-month forward exchange rate of euro relative to US dollar is 1.35. In such a condition, the euro is at premium relative to US dollar. 2. Discount: discount refers to the condition that the futures exchange rate of a currency in the foreign exchange market is lower than its spot exchange rate. For instance, the spot exchange rate of euro relative to US dollar in the foreign exchange trade market is 1.33, while the three-month forward exchange rate of euro relative to US dollar is 1.31. In such a condition, the euro is at discount relative to US dollar.
Note: Information herein is for reference only. Please refer to announcements and regulations of local branches of ICBC for further details. ICBC retains the ultimate interpretation rights.