Brake Bros, a U.K. food supplier, has entered a customized currency forward trade known as a forward extra with the Royal Bank of Scotland allowing it to benefit if sterling appreciates more than the one-year forward rate. Brake Bros has entered currency and rates swaps in the past, but this is the first time it has entered a forward extra, explained Derek Strocher, group treasurer in Ashford, Kent.
In a typical forward extra trade the corporate selects a worst case rate for exchanging currencies and the bank sets an upper knockout above the current forward rate. If the currency pair rises, but does not hit the best rate, the corporate exchanges at the spot rate at maturity, however, if at any time during the trade the currency pair moves above the knock out, the trade knocks out and the corporate is obliged to exchange at the worst rate at maturity. On the other hand, if at maturity the currency pair has breached the worst case barrier, the corporate is able to exchange at the agreed worst case rate.
The advantage to the corporate is the opportunity to exchange at better rates than offered by currency forwards. "It's a good strategy for times like these, with sterling strong in the currency markets," noted Strocher, who declined to detail the terms of the trade. RBS was the counterparty on the transaction, but Strocher said, "We work with most of the tier-one banks."
