Foreign exchange (FX) deliverables refer to physical foreign currency transactions where the underlying asset is delivered to the buyer on a specified future date. The FX market has evolved significantly over the years, and the emergence of FX deliverables has been an important development.
Historically, the FX market was primarily focused on spot transactions, where currencies were exchanged immediately. However, with the growth of global trade and the need for companies to hedge their currency risk, forward contracts became popular. Forward contracts allowed companies to lock in a specific exchange rate for a future transaction, protecting them from adverse currency movements.
FX deliverables emerged as a natural extension of forward contracts. Instead of just agreeing to a specific exchange rate, the parties involved in the transaction also agreed to physically deliver the currency on a future date. This allowed companies to more effectively manage their currency risk, as they could lock in an exchange rate and ensure that they had the necessary currency to complete their transaction.
One of the main advantages of FX deliverables is that they allow companies to more accurately forecast their costs and revenues. This is particularly important for businesses that operate in multiple countries, as currency fluctuations can have a significant impact on their bottom line. By using FX deliverables, companies can minimise their currency risk and ensure that they are not negatively impacted by currency fluctuations.
Another advantage of FX deliverables is that they can be customised to meet the specific needs of each transaction. For example, the parties involved can agree to a specific delivery date, currency, and amount. This level of flexibility makes FX deliverables an attractive option for companies that have unique currency requirements.
The use of FX deliverables has become increasingly popular in recent years. According to the Bank for International Settlements, the average daily turnover in the FX market was $6.6 trillion in 2019, with FX swaps and FX options accounting for the majority of this volume. However, the use of FX deliverables has also been on the rise, as more companies look for ways to manage their currency risk.
Despite their benefits, FX deliverables are not without their risks. One of the main risks is that the buyer or seller may not be able to fulfil their obligation to deliver the currency on the agreed-upon date. This could lead to financial losses and reputational damage for both parties. To mitigate this risk, it is important to work with a reputable counterparty and to have a clear understanding of the terms and conditions of the transaction.
In addition to the risks associated with FX deliverables, there have also been regulatory changes that have impacted the market. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced new regulations for the FX market in the United States. These regulations required certain FX transactions, including deliverables, to be reported to a trade repository. The aim of these regulations was to increase transparency in the FX market and to reduce the potential for market abuse.
FX deliverables are an important development in the FX market, allowing companies to more effectively manage their currency risk and minimise the impact of currency fluctuations on their bottom line. Despite their benefits, FX deliverables are not without their risks, and it is important to work with a reputable counterparty and to have a clear understanding of the terms and conditions of the transaction. As the FX market continues to evolve, it is likely that the use of FX deliverables will become even more widespread, particularly as companies look for ways to manage their currency risk in an increasingly globalized world.