Fixed Exchange Rate

Breaking another new ground, Kuveyt Turk has become the first participation bank to implement “forward” which fixes forward exchange.

By means of this implementation, which is a particular concern to the enterprises that engage in foreign exchange trading and perform import and export, Kuveyt Turk aims at protecting its customers from sudden fluctuations which may occur in rates of exchange due to economic uncertainties.

How shall the system operate?

On the date of agreement, the bank and the customer shall agree on amount, price and maturity. When the specified date arrives, parties shall fulfill their obligations over the agreed exchange rate.

The aim of our bank is to present this product to the customers in order to reduce the currency risk and not to mediate for speculation oriented transactions. Forward exchange is carried out in order to protect the operating profits of companies against the effects of fluctuations in foreign exchange markets. Hence, uncertainty is removed for companies that have forward cash inputs and outputs since the exchange rate and thus the amount to be applied at maturity are predetermined.

The fact the this product of ours may be applicable not only in TL/ foreign currency transactions but also in parity transactions provides a great advantage to the customers who work with different foreign currencies.

A partial margin shall be taken over the transacted amount

In the implementation of Kuveyt Turk, in order to eliminate certain risks in the implementation such as failure to fulfill contractual obligations, a margin equal to a certain percentage of the transaction size is taken. There are two types of margin, namely initial margin and maintenance margin. These margins are deposited to participation account and are then blocked; the customer receives profit share to its participation account deposited as guarantee.

Initial margin; is the amount that the customer deposits in advance to open a long or short position. It is named so as it is performed at the beginning. As long as the position is open, the position profit of the customer (unrealized open position profit) is deduced from the blockage balance, its loss, on the other hand, is added to the same balance.

As long as the customer position of the deposited initial margin remains open, it is subject to evaluation according to new forward exchange rate at the same maturity every day. (This is called "mark-to-market", i.e. update according to market price). Following the updating processes, in case that the guarantee of the customer goes below the initial margin, it is requested from the customer to bring its guarantee to the level of “initial margin” immediately.

Maintenance margin is the minimum margin amount that the customer should have in order to maintain its current position. It also known as closes. If the margin amount comes to this point, customer can not maintain his/her position and, by making an inverse transaction, a loss netting is performed to be realized at maturity.

In future deliveries, if the receiving party (long) does not want to wait until the end and to fulfill his/her purchase commitment, he/she may close his/her position as the selling party (short) in another agreement having the same terms and conditions. Otherwise, when due date comes, both parties fulfill their obligations over the exchange rate that they have previously agreed upon. Forward transaction has a binding character for both of the parties. Profit/loss that occurs as result of the fact that customers close their positions by liquidating their contract with inverse transactions is realized at maturity. The open position holder customer, as long as his/her position is open, may not take back his guarantee deposited for this position.

Who may benefit?
  • Importers and exporters.
  • Persons and companies that shall make a payment or obtain an income in foreign currency.
  • Customers who have decided to transact foreign currency but whose money is in a deposit account.
  • Customers who want to make an installment plan in foreign currency for a forward export and who want to fix his debt as of today.
    For example, if the customer who has an agreement to buy a good with 6 months term in Euros by using TL or USD, wants to fix his/her installment as of today, they shall be helped by conducting forward exchange.
What are the advantages of Forward?
  • Forward exchange markets offer the opportunity of protection against possible negative price changes in the future of the foreign exchange subject to agreement.
  • It provides the opportunity of generating a high income with the help of leverage effect and taking higher positions with small amounts of money to the investors who have market knowledge but who can not take sufficient position or who are forced to perform credit purchase/sale transactions as their capital is low.
  • As a main feature, forward transactions are not performed in organized markets and thus factors such as price, amount and maturity are not standard but determined with mutual agreement. For example, Kuveyt Turk is able to make a $2000 sales contract with its customer on 72-day term.
  • Transaction is realized without charging any commission, transaction fee, etc.

In paragraph (12), Provisional Article 76 of the Income Tax Law, the derivatives contracts which banks or mediator institutions are party to or are conducted through their medium and that grant the right and/or obligation to purchase, sell, change money or capital market tools, goods, precious metals and foreign currencies including those arranged on the basis of an economic or financial indicator of a predetermined price, amount and characteristics at a certain maturity are called as other capital market tools. According to this provision, as soon as banks or mediator institutions benefit from the provision of the derivatives contract, a 10% stoppage shall be realized over the difference between market value and transaction value of the asset that is taken as a basis for the agreement.

General Information about Forward

In an economy, the major risk that economic units encounter while taking a decision about investment is the difficulty of anticipating the future. Exchange rate risk also emerges as a risk element in a similar way. Forward exchange has been developed in order to determine a risk and protecting company operating risks from the effects of the fluctuations in foreign exchange markets.

The transactions where the maturity, amount and price of any goods (foreign exchange, agricultural product, etc.) that are subject to forward delivery are determined as of today by the parties and a contract is made to this end is called forward. The key feature of the transaction is that the purchase or sales contract is signed as of today and the payment against delivery is realized on the agreed price (forward exchange rates) on a future date. In the implementation of our bank, forward transactions include only foreign exchange. Forward is an agreement for buying or selling a currency against another currency over a predetermined exchange rate at a predetermined maturity.

Forward transactions are generally executed between the bank which operates in foreign exchange market and the customer. The reason why these transactions are needed is the uncertainty in the future regarding exchange rates. Forward may generally be used for hedging or speculation.

You may get detailed information about forward from all Kuveyt Turk branches or by calling Kuveyt Turk Call Center at 444 0 123.