Insurance company with worldwide offices

Annual turnover: £200m

The problem
85% of premiums are paid in US dollars but as a UK company the firm has fixed sterling costs and has to report in sterling.

At the beginning of the year the company looked at forecasts for the sterling/dollar exchange rate in order to set its budget rate – the foreign exchange rate set to protect future cashflows exposed to fluctuations in the currency pair. The firm set an appropriate rate of 1.60 based on predictions that the dollar would strengthen relative to sterling over the course of the year.

As the year progressed it was clear that the market was going to move against the client, with the rate reaching 1.70, representing a meaningful threat to its bottom line.

The solution
The firm spoke to Investec, which suggested an outperformance product, allowing the client the potential to convert dollars at the established budget rate of 1.60 even though the market had moved a lot higher than that. This was achievable through the use of a bonus feature giving the client an incremental improvement in its protected rate for every cent of weakening in the dollar.

Effectively, the solution gives clients a guaranteed protected rate with an additional upside in that if the spot rate then moves higher against them, that guaranteed rate improves by the amount the market has moved. This product works effectively for clients when the market is not moving in their favour.


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