Thursday, July 02, 2009

GBP/HKD FX contract entered into

I have received a payment in GBP. As I have no plans which involve investing in GBP denominated assets, I have no need to hold GBP cash in the private portfolio. That said, I have no immediate need for more HKD either which leaves me rather neutral on whether I keep the money in GBP or convert to HKD.

Accordingly, rather than simply convert back to HKD at the prevailing spot rate (less the bank's spread), I entered into an FX contract.

Details are as follows:

Currency pair: GBP/HKD
Strike rate: GBP1.00 = HKD 12.76
Spot rate: GBP1.00 = HKD 12.7626
Annualised premium: 12.775%
Calculation date: 31 July 2009
Maturity date: 3 August 2009

In effect what I have done is written a put option on the HKD against the GBP. If the HKD rises/GBP falls, I will end with HKD at a better conversion rate than I would get if I did the conversion today (including interest, the effective rate would be 12.902). If the reverse happens, I will still hold the GBP but will be earning a rate of interest well above what I could get on bank deposits.

Given my (marginal) preference to hold HKD rather than GBP, I have used a strike price which is close to the spot rate (in spite of which the premium is actually quite low). The only thing I do not want to see happen is for the GBP to fall significantly against the HKD during the contract period. My break even closing FX rate is 12.62. If GBP drops below this level on 3 August, I would have been better off doing a straight conversion.

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