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Introduction         

The purpose of this presentation is to provide information about foreign currency forward, option dated forward and foreign currency option. These products are designed to assist business customers, such as, importers and exporters or individuals to protect their business against adverse exchange rate movements.

Forward Contract

A Forward Contract lets your company buy or sell one currency against another, for settlement on the day the contract expires. Unlike spot contracts, a forward contract eliminates the risk of fluctuating exchange rates by locking in a price today for a transaction that will take place in the future. This is called hedging (or insuring) your expected foreign currency transactions. By protecting your future cash flow against negative currency fluctuations, it can eliminate some of the uncertainty of doing business.

For example, if a company expects an inflow of Georgian Lari (GEL) from its operations and has to pay US Dollar (USD) to the suppliers after 1 month, it can buy USD against GEL from the bank with settlement after one month at an exchange rate which is agreed at the moment of the deal. Thus the company buying USD/GEL forward eliminates the possibility of a gain/loss which can occur due to the exchange rate fluctuations during the 1-month period. The exchange rate can be at discount or at premium to current spot USD/GEL rate depending on the difference between interest rates of 1-month USD and GEL deposits.

An Option-Dated Forward Contract lets your company eliminate downside risk by setting a price today for a foreign exchange transaction at a future date. Unlike a regular forward contract, which requires you to complete the transaction on the day it expires, the Option-Dated Forward lets you complete transaction during a period, from deal date up to the expiry date. This option gives you all the advantages of regular forward contracts plus added flexibility. And consolidating a number of small forward requirements into one larger contract can be more convenient and cost effective. An Option-Dated Forward Contract is available for transaction when you buy foreign currency against GEL.

For example, suppose that on December 31, your company believes it will have to sell the following USD amounts in the month of January:

January 02           USD  200,000

January 18           USD 300,000

January 25           USD 500,000

                ____________

Total      USD 1,000,000

If you're sure of the day you will require each amount, you can book separate forward contracts for each date and amount. But if the timing is uncertain, consolidating your requirements into one USD 1,000,000 Option-Dated Forward contract lets you fix a price on December 31 and then sell USD as you need in January by total amount USD 1,000,000.

Foreign Currency Forward and Option Dated Forward Contracts bear a counterparty credit risk, therefore execution of these contracts is subject to the credit risk approval. Before final agreement, the client is obliged to place amount on the Bank’s account or the Bank may establish credit line as a collateral of this transaction. Depend on FX rate future fluctuation the Bank has a right to request additional collateral.