Startup Culture Podcast: Rodney Williams of LISNRRead
Square 1 Bank Announces Credit Facility to HealProsRead
Correspondent Banking allows you to access international markets through Square 1. Our partnerships with the world’s leading financial institutions will help you facilitate foreign investments, payments and trade.
Our Foreign Exchange (FX) platform allows clients to conduct business in multiple currencies. Through our partnerships with global banking institutions, we can execute FX transactions efficiently and provide a variety of valuable services. We also offer comprehensive consultation and solutions for complex needs like currency hedging.
Forward contracts specify the delivery of currency at a future date at a price established on the contract’s origin date. These contracts guarantee the U.S. dollar value of a future business commitment involving the purchase or sale of foreign currency.
How They Work
A forward FX transaction is an agreement between your company and Square 1 for the exchange of specific currency amounts at a designated settlement date in the future. The exchange rate applied in the forward FX contract is agreed upon at the trade date.
The forward exchange rate is derived from the current market spot rate, time to maturity and interest rate differentials between the two currencies.
There is no upfront fee.
XYZ Company imports telecommunication equipment from a Canadian supplier at a cost of CAD 3 million. XYZ Co. is invoiced and payment is due in 180 days (t+180).
On the forward maturity date (t+180), XYZ Co. will exchange 0.7575 USD per each CAD received. In this example, XYZ Co. will exchange USD 2.2725 MM with Square 1 and receive CAD 3.0 MM on t+180. XYZ Co. will then have Square 1 wire the CAD 3.0 MM to the Canadian supplier.
Square 1 can arrange drafts or wire payments for forward delivery at competitive rates to settle a company’s foreign currency payables. Additionally, a company’s foreign currency receivable payments may be directed through our network of correspondent banks for credit to the company’s U.S. dollar account.
Swap contracts are agreements to exchange currencies on one date and re-exchange those currencies after an agreed-upon time period.
Under non-deliverable forward (NDF) contracts, no actual delivery of the contracted currency will occur at maturity. The only settlement/exchange that will occur on the maturity date will be the difference between the U.S. dollar value at the contracted NDF rate and the U.S. dollar value at the current spot reference rate or fixing rate.
How They Work
A NDF transaction is a forward FX hedging mechanism where the physical exchange of currency at expiry is replaced by settlement between counterparties of the net profit/loss on the contract, calculated using the prevailing spot fixing rate two days prior to settlement. The net settlement will occur in a predetermined convertible currency, typically USD.
A client can use an NDF to hedge against a currency that does not have a deliverable market offshore, including the Taiwan Dollar (TWD), Korean Won (KRW), Chinese Yuan (CNY), Brazilian Real (BRL) and Argentine Pesos (ARS).
There is no exchange of principal and no upfront fee.
XYZ Company imports telecommunication equipment from a Brazilian supplier at a cost of BRL 3 million. XYZ Co. is invoiced and payment is due in 180 days (t+180). The supplier wishes to be paid in USD in an amount equivalent to BRL 3 MM. Thus, XYZ Co.—not the supplier—is exposed to exchange rate fluctuations.
Scenario 1: NDF Hedge is In-the-Money (ITM)
Spot Fixing Rate: 0.8000
At maturity, XYZ Co. has the obligation to buy BRL 3.0 MM from Square 1 at the rate of 0.7690 compared to the spot fixing rate of 0.8000. However, since BRL is a non-convertible currency, the net amount will be settled in USD.
To settle the NDF, Square 1 will make a payment of USD 93,000 to XYZ Co. on t+180. The amount is calculated as follows from the perspective of XYZ Co.:
(BRL 3.0 MM * 0.8000) – (BRL 3.0 MM * 0.7690) = USD 93,000
XYZ Co. benefits from the hedge despite the strengthening of BRL and can budget that the net cost of the equipment will be, in dollar terms, USD 2.307 MM. XYZ Co. will then have Square 1 wire to the Brazilian supplier USD 2.4 MM and XYZ Co. will also receive USD 93,000 from Square 1. The net of the payments equals the budgeted amount of USD 2.307 MM. The supplier will then convert the USD to BRL with its own bank.
Scenario 2: NDF Hedge is Out-of-the-Money (OTM)
Fixing Rate: 0.7410
At maturity XYZ Co. has the obligation to buy BRL 3.0 MM from Square 1 at the rate of 0.7690 compared to the fixing rate of 0.741. However, since BRL is a non-convertible currency, the net amount will be settled in USD.
To settle the NDF, XYZ Co. will make a payment of USD 84,000 to Square 1 on t+180. The amount is calculated as follows from the perspective of XYZ Co.:
(BRL 3.0 MM * 0.741) – (BRL 3.0 MM * 0.7690) = – USD 84,000
XYZ Co. will have Square 1 wire USD 2.223 MM to the Brazilian supplier and will pay USD 84,000 to Square 1. The sum of the payments equals the budgeted amount of USD 2.307 MM. The supplier will then convert the USD to BRL with its own bank.
Option contracts give you the right to buy or sell a specific currency at a predetermined rate on a fixed date. Our currency option mitigates risk by offering guaranteed exchange rate protection and/or potential upside during a specified time frame (e.g., pending bid acceptance or while an obligation exists).
How They Work
The purchase of an FX option contract provides the client with the right, but not the obligation, to buy a specified amount of an underlying currency at an agreed-upon exchange rate (the strike rate) on a specific future date (the expiry date).
In exchange for buying this right, the client will pay an upfront fee, known as the option premium, to Square 1 Bank.
The client will choose the currency pair and option maturity date as business needs require. The strike price can be negotiated, but it is typically either the forward price associated with the option maturity date or the current spot price on the date the option contract is purchased.
XYZ Company is negotiating a potentially large product sale, GBP 4.0 MM, with a British customer that would close in 90 days (t+90). Exchange rates are currently favorable for remitting GBP back into USD. XYZ Co. wants to be opportunistic with the exchange rate environment if the sale happens by protecting itself from a fall in GBP/USD, but does not want to be obligated to an FX transaction if negotiations fall apart. Also, XYZ Co. would like to maintain upside potential if exchange rates continue to move in its favor.
XYZ Co. will purchase a USD call option (GBP put option) with the following details.
Option Premium: USD 255,000 paid upfront to Square 1
Scenario 1: The sale is negotiated with the British customer for a t+90 close.
At expiry if:
GBP/USD < 1.36; XYZ Co. will exercise its right to sell GBP at the strike rate of 1.36. The status of the option is known as in-the-money (ITM). The option has protected XYZ Co. from a fall in GBP/USD.
GBP/USD > 1.36; XYZ Co. will forgo its right to sell GBP at the strike rate of 1.36 and execute a spot transaction at the prevailing market rate instead. The status of the option is known as out-of-the-money (OTM). The option has allowed XYZ Co. to capture the upside of an increase in GBP/USD.
Scenario 2: The sale falls through before maturity date of the option.
At expiry if:
GBP/USD < 1.36; with the option ITM, XYZ Co. can exercise its right to sell GBP at the strike rate of 1.36 and immediately buy the GBP back from Square 1 for a profit in a spot transaction at the prevailing market rate. XYZ Co. could also choose to sell the option itself back to Square 1 before the expiry date.
GBP/USD > 1.36; with the option OTM, XYZ Co. can forgo its right to sell GBP at the strike rate of 1.36 and let the option expire worthless.
Spot transactions encompass the purchase or sale of currency for immediate delivery at the current market rate, with the average settlement taking two business days. Square 1 can arrange drafts or wire payments for spot delivery at competitive rates to settle a company’s foreign currency payables.
How They Work
A spot FX transaction is an agreement between your company and Square 1 to exchange a specific amount of currency for another at the prevailing market exchange rate.
Physical delivery of most currencies typically occurs two days after the trade date (t+2), often known as the value date.
XYZ Company purchases components from a Japanese supplier at a cost of JPY 9 million. The invoice is due in 30 days.
Two days prior to the invoice due date XYZ Co. will enter into a spot transaction with Square 1 where XYZ Co. will exchange 0.01087 USD per each JPY received. XYZ Co. will exchange USD 97,830 with Square 1 and receive JPY 9.0 MM on the value date to fulfill the invoice.
Square 1 can arrange drafts or wire payments for spot delivery at competitive rates to settle a company’s foreign currency payables. As well, a company’s foreign currency receivables may be directed through our network of correspondent banks for credit to the company’s U.S. dollar account.
Window forwards are contracts with a designated settlement period rather than a specific settlement date. These contracts provide the same pricing guarantee as a traditional forward contract and are mostly used when a transaction is assured, but the precise delivery date is uncertain. This allows a company the option to receive or pay in a foreign currency at any time during a 30-day period.
Square 1 can help you manage risks and costs by leveraging our experience and global relationships. We can provide payment risk mitigation through export letters of credit and documentary collections, creative solutions for your unique trade needs, and enhanced vendor relationships with import letters of credit and documentary collections.
We are ready to assist you when your supplier moves you to an open account. We can help reduce the hidden costs of open account processing by reviewing documents and making payments to your supplier.
Whether through the terms of a letter of credit or on the basis of a trade transaction alone, Square 1 can provide financing terms to cover your trade transaction.
Square 1 can issue a Standby Letter of Credit for numerous purposes, including bid and performance bonds, advance payment/payment guarantees, lease agreements, workers’ compensation, open account sales, tender offers and loan collateral.
Square 1 can issue an Import Letter of Credit on your company’s behalf, providing assurance that your goods will be shipped as you intended—before you pay.
An Export Letter of Credit provides you as an exporter a high level of assurance that you will be paid for goods and services provided to a buyer. Square 1 can assist you in receiving payment for your goods or services.
In the event that you are required to issue a guarantee in a foreign country, Square 1 stands ready to assist you. By working with our dedicated partner banks, we can have a guarantee issued to fulfill your needs.
When your company is dealing with a known and trusted supplier, Square 1’s Import Documentary Collections offer a quick and easy way to reduce risk.
Square 1’s Export Documentary Collection will enable you to facilitate payment from your buyers relatively simply and cost-effectively. You maintain control over the delivery of your goods until payment or a promise of payment has been received from your buyer.