FX
FX SPOT = CONVERSION = $$ MOVEMENT = CCS
FX FORWARD = CONVERSION RATE + DATE LOCK = NO $$ MOVEMENT TODAY
FX OPTION OR "SWAPTION" = CONVERT RATE LOCK = RIGHT (NOT OBLIGATION) TO $$ MOVEMENT = PAY PREMIUM
FX OPTION = Right, not obligation, to exchange at a rate = Pays premium today = Insurance policy
SWAPTION = Option to enter a Swap = Pays premium today = Insurance policy for a Swap
FLOWS
PREFUNDED VIA COP BORROW
Mural borrows COP from local bank
Mural converts COP for USD (spot)
Mural sends USD to Circle
Circle sends USDC to Mural
Merchant account funded
Acquirer sends COP to Mural
Mural repays COP loan principal + interest
PREFUNDED VIA USD BORROW
Mural borrows USD from bank
Mural sends USD to Circle
Circle sends USDC to Mural
Merchant account funded
Acquirer sends COP to Mural
Mural converts COP to USD (spot)
Mural repays USD loan principal + interest
Problem: Settlement risk, also known as delivery risk or counterparty risk, is the risk that a counterparty (or intermediary agent) fails to deliver a security or its value in cash as per agreement after the first party has delivered the security or cash value.
Solutions:
Limits on the amount of transactions to settle with each counterparty on a given day to avoid developing a large exposure to a single counterparty;
Settlement through a clearing house to reduce exposure and liquidity required by netting transactions (bilateral or multilateral);
Requirement of initial margin deposits (also called "collateral deposits") and variation margin to provide a safety buffer;
Provide independent valuation of trades and collateral and monitor the creditworthiness of the parties to enhance transparency and risk management;
Set up a guarantee fund that can be used to cover losses that exceed a defaulting member's collateral on deposit;
Settlement through a central counterparty clearing to mutualize or transfer the settlement risk (cf. novation);
Settlement via Delivery versus payment or Payment versus payment mechanism;[6]
Settling foreign exchange via a special-purpose entity, such as the CLS Group;
Settling via a cryptographic consensus system, such as a blockchain.[7]
CLS
RESOURCES
https://www.banque-france.fr/system/files/2023-04/payments_market.pdf
FX Spot: immediate conversion + cash move.
FX Forward: rate + date lock, no cash today.
FX Option/Swaption: right (not obligation) to exchange/enter swap, pay premium today.
FX SPOT = CONVERSION = $$ MOVEMENT = CCS
FX FORWARD = CONVERSION RATE + DATE LOCK = NO $$ MOVEMENT TODAY
FX OPTION = CONVERSION RATE LOCK RIGHT (NOT OBLIGATION) TO $$ MOVEMENT LATER = PAY PREMIUM TODAY
Last updated