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Hedging Currency Risk with Seagull Options for a New Zealand Scrap Metal Exporter

Background

A New Zealand-based exporter specializes in scrap metal shipments to the Philippines. Anticipating receipts of USD 3,000,000.00 over the next 4 months, the current cost rate is set at 0.6100.

However, the exporter remains open to renegotiating pricing terms if the NZD/USD exchange rate surpasses 0.6300. Conversely, concerns arise regarding potential depreciation of the NZD/USD exchange rate, prompting an exploration of strategies to capitalize on rates below 0.5800.

Strategy: Seagull Option Hedging

Corporate Alliance FX provided the Seagull Option structure to the client. The client decided to enter a 3-month Seagull Option strip when the Spot rate at the time was at 0.6100 for USD 1,000,000.00 each starting from July to September 2024. The client considered the following Seagull Option Pricing to hedge their exposure:

  • Protection Amount: Selling USD 1,000,000.00 into NZD
  • Protection Rate: 0.6150
  • Max Protection Rate: 0.6300
  • Participation Rate: 0.5800
  • Repeat Frequency: 1 month
  • Total Expiries: 3 (monthly)

Analysis and Benefits

This Seagull Option structure provided the businesses with a balanced approach to hedging. It could offer protection against unfavorable exchange rate movements while allowing them to benefit from favorable rate movements, all without significant upfront costs.

Outcomes

First Expiry

  • Spot Rate: The Spot rate is at 0.5850, which is lower than the Protection Rate (0.6150) and higher than the participation rate 0.5800.
  • Protection Rate: 0.5850 NZD/USD
  • Participation Rate: 0.5800 NZD/USD
  • Outcome: The client will have an option to participate at the Spot rate of 0.5850 or not convert any amount.

Second Expiry

  • Spot Rate Movement: The Spot rate is higher than the protection rate of 0.6150, but lower than cap rate 0.6300 at expiry.
  • Protection Rate: 0.6150 NZD/USD
  • Cap Rate: 0.6300 NZD/USD
  • Outcome: The business has the right to buy NZD & Sell USD 1,000,000.00 at a protection rate 0.6150.

Third Expiry

  • Spot Rate Movement: The Spot rate is 0.6350 which is higher than the Max Protection Rate of 0.6300.
  • Protection Rate: 0.6300 NZD/USD
  • Adjusted Rate: 0.6200 NZD/USD
  • Outcome: The business has the right to buy NZD & Sell USD 1,000,000.00 at a protection rate 0.6150.
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Corporate Alliance Group Pty Ltd (ABN: 58 167 119 226) trading as Corporate Alliance FX (“CAFX”) holds an Australian Financial Services License (AFSL No: 523351) issued by the Australian Securities and Investments Commission, and is registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC) as an independent remittance dealer (Registration No – IND100697688-001).

Corporate Alliance Payments Pty Ltd (ABN: 66 650 245 382) trading as CAPAY is an Authorised Representative (001295931) of Corporate Alliance Group Pty Ltd (ABN 58 167 119 226), and is registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC) as a remittance dealer (Registration No IND100792739-001), and a Remittance Network Provider (RNP) (Registration No. RNP100792739-001).

Corporate Alliance Pty Ltd (ABN: 51 644 169 148) trading as Corporate Alliance Finance (“CAFIN”) is an Authorised Representative (ASIC AR No. 001297733) of Corporate Alliance Group Pty Ltd (ABN 58 167 119 226), which holds an Australian Financial Services Licence issued by the Australian Securities and Investments Commission (AFSL No: 523351).

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