Armenian Development Bank offers financial instruments to avoid foreign exchange risks. These give the clients opportunity to hedge themselves from foreign exchange rate fluctuations by fixing future exchange rates. The bank offers forward and option contracts for sale and purchase.

FORWARD TO BUY

Forward to buy ensures the client from foreign exchange rate rising. In case of conclusion the contract the client is obliged to buy from the bank the certain foreign currency (for example USD) after 15, 30, 60 or 90 days and the bank has to sell that currency by fixed rate in occasion of client's request. Hereby the client is not able to refuse to deal, if the exchange rate in the market is lower than the contract rate as of forward's date. The bank is not able to refuse to deal as well, if the exchange rate in the market is higher than the contract rate as of forward's date. The client has to keep at least 5% of forward's amount on his account as contract's collateral.

Example of Forward to buy

On 1 June, 2009 the client signs forward contract to buy with 1 September, 2009 value date. The principal amount of basis currency is 100,000 USD, the forward rate is 370 AMD=1$. This contract gives to the client an opportunity to buy 100,000 USD after 3 months by 370 AMD=1$ exchange rate. If at the day of transaction, i.e. 1 September, 2009 the market rate is 380 AMD then the client requests the bank to sell him 100,000 USD with the rate of 370 AMD. Without the forward contract the client needs to buy 100,000 USD from the market with the rate of 380 AMD =1$ by paying 38 million drams. In case of forward contract the client pays only 37 million drams. Thus forward contract gives him 1 million drams additional income. Client's income = (380 (market rate) -370 (forward rate)) * 100,000 (principal amount) =1,000,000 AMD

FORWARD TO SELL

Forward to sell ensures the client from foreign exchange rate reducing. In case of conclusion the contract the client is obliged to sell the bank the certain foreign currency (for example USD) after 15, 30, 60 or 90 days and the bank has to buy that currency by fixed rate in occasion of client's request. Hereby the client is not able to refuse to deal, if the exchange rate in the market is higher than the contract rate as of forward's date. The bank is not able to refuse to deal as well, if the exchange rate in the market is lower than the contract rate as of forward's date. The client has to keep at least 5% of forward's amount on his account as contract's collateral.

Example of Forward to sell

On 1 June, 2009 the client signs forward contract to sell with 1 September, 2009 value date. The principal amount of basis currency is 100,000 USD, the forward rate is 370 AMD=1$. This contract gives to the client an opportunity to sell 100,000 USD after 3 months by 370 AMD=1$ exchange rate. If at the day of transaction, i.e. 1 September, 2009 the market rate is 360 AMD then the client requests the bank to buy from him 100,000 USD with the rate of 370 AMD. Without the forward contract the client needs to sell 100,000 USD in the market with the rate of 360 AMD =1$ by receiving only 36 million drams. In case of forward contract the client receives 37 million drams. Thus forward contract gives him 1 million drams additional income. Client's income = (370 (forward rate) -360 (market rate)) * 100,000 (principal amount) =1,000,000 AMD

OPTION TO CALL

 Option to call ensures the client from foreign exchange rate rising. Buying this kind of option the client accrues a right to buy from the bank foreign currency (only USD and Euro) with the rate defined by the bank on the date of contract conclusion after 30,60,90 or 180 days. Meanwhile the bank is obliged to sell the client the certain foreign currency at his first request with the exchange rate mentioned in the contract. Hereby the client has a right to refuse to deal if the market rate is lower than the option rate as of option implementation date. The client pays to the bank fixed premium at the date of contract conclusion.

Example of Option to call

On 1 June, 2009 the client acquires an option to call by paying a premium to the bank (for example 450,000 drams) with 1 September, 2009 implementation date. The option's principal amount is 100,000 USD and the option price is 370 AMD=1$. The option contract gives to the client a right to buy 100,000 USD after 3 months by 370 AMD=1$ exchange rate. Suppose at the day of transaction, i.e. 1 September, 2009 the market exchange rate is 380 AMD then the client requests the bank to sell him 100,000 USD with the rate of 370 AMD. Without the option contract the client needs to buy 100,000 USD from the market with the rate of 380 AMD =1$ by paying 38 million drams. In case of option contract the client pays only 37 million drams. Thus forward contract gives him 550,000 drams additional income. Client's income = (380 (market rate) -370 (option rate)) * 100,000 (principal amount) - 450,000 (bank's premium) = 550,000 AMD

OPTION TO PUT

Option to call ensures the client from foreign exchange rate reducing. Buying this kind of option the client accrues a right to sell the bank foreign currency (only USD and Euro) with the rate defined by the bank on the date of contract conclusion after 30,60,90 or 180 days. Meanwhile the bank is obliged to buy from the client the certain foreign currency at his first request with the exchange rate mentioned in the contract. Hereby the client has a right to refuse to deal if the market rate is higher than the option rate as of option implementation date. The client pays to the bank fixed premium at the date of contract conclusion.

Example of Option to put

On 1 June, 2009 the client acquires an option to put by paying a premium to the bank (for example 450,000 drams) with 1 September, 2009 implementation date. The option's principal amount is 100,000 USD and the option price is 370 AMD=1$. The option contract gives to the client a right to sell 100,000 USD after 3 months by 370 AMD=1$ exchange rate. Suppose at the day of transaction, i.e. 1 September, 2009 the market exchange rate is 360 AMD then the client requests the bank to buy from him 100,000 USD with the rate of 370 AMD. Without the option contract the client needs to sell 100,000 USD in the market with the rate of 360 AMD =1$ by receiving only 36 million drams. In case of option contract the client receives 37 million drams. Thus forward contract gives him 550,000 drams additional income. Client's income = (370 (option rate) -360 (market rate)) * 100,000 (principal amount) - 450,000 (bank's premium) = 550,000 AMD