Examples of arrangements that do not create a ‘one-way exchange effect’

Example 1

Company A, which is resident in the UK, acquires shares in a Eurozone subsidiary of €50 million. In order to hedge the investment, the parent company of A (‘ParentCo’) borrows €50 million from an external bank, which it on-lends to A on identical terms. However, ParentCo wishes to limit its potential exchange loss on the borrowing if the euro strengthens, so it enters into a collar arrangement with a bank (see CFM13350 if you need an explanation of a collar) under which ParentCo will not have to bear further forex losses if the euro appreciates against sterling by more than 10%, but equally it will not profit if the euro depreciates by more than 15%.

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