Selected risks related to closing derivative transactions

    Currency derivative transactions are used by our clients primarily as an instrument for reducing currency risk. In these cases, the level of risk borne by the client in connection with these transactions is low. However, if these instruments are used for investing and for executing speculative transactions, the level of risk may increase significantly. The information provided below gives an overview of the basic types of risks related to currency derivative transactions offered by the Company.[1]

    It is the client’s obligation to familiarize itself, to the maximum extent possible, with the risks involved in the derivative transaction intended by the client, to weigh all risks and to understand the essence of these risks, the relevant legal relations and other aspects. In case of any concerns or questions, the client is obligated to ask for more information from the company, which is a licensed brokerage firm. If the client fails to fully understand the terms and conditions under which derivative transactions are executed and the amount of potential loss, which may in some cases exceed the capital invested, then the client should not enter into such transactions. The client must be aware that the client’s chosen strategy and financial goals should reflect the client’s risk profile.

    Selected risks related to closing derivative transactions

    If derivative transactions are used by exporters/importers for hedging the exchange rate – typically to minimize the risk of a decrease or complete loss of the profit margin in case of an unfavourable change of the exchange rate – the client must be aware of the fact that in case of an exchange rate change that is favourable for the client, the hedging advantage is offset by inability to profit from this favourable change. If derivative transactions are used for speculative purposes, the client must be aware that any potential revenues achieved in the previous period do not guarantee the achievement of any future revenues by using the same investment instrument, i.e. in this case a derivative transaction.

    Selected risks

    Market risk – the risk of loss arises from unfavourable developments in interest rates, currency risk and volatility. It is an aggregate term for interest rate risk, currency risk, risk on shares and commodity risk as well as other risks related to market price changes.

    Currency risk – with regard to hedging transactions, the currency risk of derivative transactions lies in the fact that the buyer/seller could buy/sell a foreign currency during or at the end of a derivative transaction for a price that is better than the price set at the time of closing the transaction. In general, currency risk is a risk of change in the value of a derivative transaction as a result of exchange rate changes.

    Interest rate risk – a risk that arises from a change in market interest rates. The value of a derivative transaction may change not only with the exchange rate itself, but also as a result of changes in the market interest rates of the currencies being traded. This risk can be of significance especially in case of longer derivative transactions.

    Counterparty risk – counterparty risk or, in other words, credit risk is a risk that the counterparty to a transaction will not be able to meet its obligations, i.e. to fulfil all of its obligations (to provide services or other performances) to which it is bound by contract. As regards derivative transactions, it is AKCENTA CZ a.s. who is the counterparty for transactions with the client.

    Leverage – this risk arises from the use of a little volume of invested capital compared to the nominal value of a derivative transaction purchased by the client. Thus, leverage enables the client to trade and to bear the financial risk in a volume that is higher than the client’s initial investment, e.g. by providing financial collateral or by using the Dealing Limit. Thanks to this, even the slightest change in the price may bring the client a considerable profit, but obviously also a loss, compared to the initially invested amount. This situation may result in the need to replenish financial collateral or to immediately terminate the transaction by a counter-transaction and accept the resulting loss.

    Liquidity risk – liquidity risk lies in the time differences between financial flows, which may threaten the ability to meet one’s due obligations at any moment. For example, liquidity risk stems from the late payment of an obligation by a third party and the resulting need to move the due date of a derivative transaction. This move may involve additional costs, e.g. the costs of swap points.

    Risk of inability to close a counter-transaction – executing a transaction aimed to exclude or limit the risks stemming from derivative transactions (closing a position, exiting a trade) will be possible only at increased costs or it will not be possible to execute the transaction at all.

    Risk of indeterminable loss – taking into account the payables arising from derivative transactions, the amount of the risk the client is exposed to may be indeterminable and may exceed the value of the security the client has provided, if any, which may also affect other assets of the client.

    Transfer risk – the possibilities of transfer of individual currencies may be limited as a result of foreign exchange controls by the country that issues the currency in question. This could endanger the proper execution of a foreign exchange derivative transaction.

    [1] The presented information constitutes advice on the major and most important types of risk associated with the use of futures, however cannot be considered as complete and exhaustive advice on all the aspects associated with the risks of using futures.

    Before signing a Framework Agreement and closing a transaction or at any time on request, dealers will be glad to explain you the individual types of risks, whether orally or in writing.