Sample Product Plan - FX Trading

8/2/2019 Sample Product Plan - FX Trading

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Prepared by: (Provide Name of Officer)(Provide Name of Company)

FOREIGN EXCHANGE TRADING:

PRODUCT PLAN


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Description/Definition

Foreign exchange trading involves the buying and selling of one currency in exchange foranother e.g. USD against JAD, KYD against JAD, USD against GBP, USD against CAD,USD against JAD etc.

With spot trading, settlement must occur within two (2) days of initial trade or riskcancellation or other penalty.

Generally, settlement must occur on the day of initial agreement. However, when tradingwith international entities, settlement is extended to two days from confirmation.

Forward trading involves an agreement to buy/sell one currency for another at somespecified rate in the future on a specified date in the future.

Ideally, one should buy at a low price and sell at a higher price, allowing a spread.

However, due to uncertainty in the market, a profit is never guaranteed and one can oftenbreak even or make a loss depending on the actions of the market.

Target Market/Customers

The target markets are those individuals or groups who are importers or exporters offoreign goods or services. These include:

Hotels, Jewellers, Automobile Dealers, Food Importers/ Exporters, Airlines,Pharmaceutical Distributors, Telephone Companies, Insurance Companies, BrokerageCompanies, Cambios and Authorised Dealers.

Cost/Benefit Analysis

Benefits

Fx trading has a 24-hour market. Thus profit can be made around the clock, sinceat every hour in the day some market in the world is still open.

The Fx trading market is a very liquid one. At the end of the day, one is able touse the same funds, which was used to trade, and invest in the securities marketwithout any complications.

Fx trading can be used as a hedging strategy to provide protection against adversemovements in exchange rates that affect the companys revenue or holdings

In times of great volatility, Fx trading can be very profitable.CostsSee Risk & Management below.


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Risks & Management

Foreign Exchange Trading is exposed to risks daily and as such, these need to be hedgedto prevent unnecessary losses to (Provide Name of Company).

I. Losses due to charges:To hedge against these, (Provide Name of Company) charges fees for services renderedwhich incur a cost to us. These include:

Transaction Type Applicable Fee

Managers cheques JAD $

Wire Transfer USD $

Stop Payment orders (JAD) JAD $

Stop Payment orders (CAD) CAD $Stop Payment orders (GBP) GBP $

Stop Payment orders (USD) USD $

Cash Lodgement 0.0%

The above fees are based on the charges, which (Provide Name of Company) incurtransacting with commercial banks and helps minimise losses and maximise gains.

II. Negative SpreadsTo prevent this, as much as possible, all purchases should be matched with sales, with

sales obviously negotiated at a higher price. However, this may not always be possible,and so in times of great volatility, a position should not be kept of more than US$amountor its equivalent unless authorized by the Treasury Manager or a higher authority.

III. Losses due to stipulated surrenders:Each day, a minimum of X percent (X%), up to a maximum of Y percent (Y%) of allcommercial purchases must be surrendered to the Central Bankat the days weightedaverage selling rate. To prevent transactional losses, it is critical that Traders factorsurrender prices in determining their overall selling prices. In addition, when surrendersmay incur losses due to the rate at which currency was purchased, only X percent (X% -

the lower surrender limit) should be surrendered as opposed to the optional Y percent(Y%).


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IV. Settlement/Default Risk:This refers to the risk that a client may not settle within two days, resulting in losses dueto overdraft, or the opportunity cost of not being able to use the funds at a specific time.

In such cases, (Provide Name of Company) reserves the right to cancel the transaction orcharge interest on funds extended for late payment.

In all transactions, (Provide Name of Company) runs the risk that the counterparty maydefault on a transaction. To avoid this, especially with transactions in excess ofUS$amount, the traders should prepare confirmation letters which should be signed bycounterparty before any payment is made.

V. Credit RiskThis refers to the risk that cheques accepted might be returned by the bank due to lack of

funds in the counterparts account. To reduce this risk, personal cheques should not beaccepted until a relationship is established with a client. Until approved, only certifiedcheques should be accepted from the customer.

Operating Structure

The operating Structure of (Provide Name of Company) is such that the foreign exchangetraders are responsible for the confirmation of all trades up to a maximum ofUSD$amount or its equivalent in other currencies. For trades in excess of this amount,authorization must me sought from the Treasury Manager, before the trade is confirmed.

Upon Authorization, a contract note should be prepared by the trader, which shouldspecify the rate and amount of the trade (see Internal Documentation below). Thiscontract note should be checked and signed by the Operations Manager and then bepassed on to the Operations Clerk to prepare the relevant cheque. A copy of the signedcheque should be kept on file and the original passed on to the cashier to awaitpayment/collection to/from the counterparty. Payment may also be passed on to anauthorised (Provide Name of Company) bearer who should deliver the relevant chequeand return payment to (Provide Name of Company).

Clients/Bearers should sign for all cheques/cash received, and the relevant document kepton file, to determine liability in the event of loss, theft or other.


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Accounting Guide

Purchasing:

Currency Debit Credit

USD USD Base AccountBank USD Account/Broker USD Account

Bank JAD AccountUSD Position Account

GBP GBP Base AccountBank GBP Account

Bank JAD AccountGBP Position Account

CAD CAD Base AccountBank CAD Account

Bank JAD AccountCAD Position Account

Selling:

Currency Debit Credit

USD USD Position AccountBank JAD Account

USD Base AccountBank USD Account/Broker USD Account

GBP GBP Position Account

Bank JAD Account

GBP Base Account

Broker GBP Account

CAD CAD Position AccountBank JAD Account

CAD Base AccountBroker CAD Account

Regulatory Issues

(Provide Name of Company) is governed by the Central Bank of (Country). Thecompany and its Traders are bound to certain regulatory provisions which speak to properprocedure in regards to:

The Purchase and Sale of Foreign Exchange Surrender to the Central Bank Reporting Maintenance of Bank Accounts Examination of Accounts


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The companys Fx trading operations are also guided by the duration and Renewal of itsFx Trading licence and prescribed fees.

All trading is supervised by local and international Anti-Money Laundering Guidelines.(These guidelines are readily available online).

Taxation

The profit accumulated from foreign exchange trading is not directly taxable. However,the company is subject to taxation when corporate taxes are being paid at a rate of(provide tax rate applicable).

Internal Documentation

In addition to the recording of all transactions on the respective positions, all confirmedtransactions should be recorded on a contract note, which specifies the:

Transaction Type Counterparty Current, Effective & Settlement Date Currency Amount Exchange rate Other Currency Equivalent Charges Payee Cheque No.

All contract notes should be signed by at least one of the directors before any paymentsare made. All external correspondence concerning the settlement of a trade should besigned by at least two of the directors and /or managers, before being dispatched tocounter parties.

Documents

Sample Product Plan - FX Trading