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

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FLOWS

PREFUNDED VIA COP BORROW

1. Mural borrows COP from local bank

2. Mural converts COP for USD (spot)

3. Mural sends USD to Circle

4. Circle sends USDC to Mural

5. Merchant account funded

6. Acquirer sends COP to Mural

7. Mural repays COP loan principal + interest

PREFUNDED VIA USD BORROW

1. Mural borrows USD from bank

2. Mural sends USD to Circle

3. Circle sends USDC to Mural

4. Merchant account funded

5. Acquirer sends COP to Mural

6. Mural converts COP to USD (spot)

7. Mural repays USD loan principal + interest

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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

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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