TNAG-0772-FCO40-976-Modernisation-and-electrification-of-the-Kowloon-Canton-Rail-1978 — Page 51

TETRO-CAMMELL: EXTENSION OF TENDER TO CONTRACT SCHEME TO HONG KONG

OLLARS

Fonward Under the Tender-to-Contract scheme ECGD quote the exporter rates of exchange with sterling on the basis of which the exporter can convert a sterling bid into foreign currency. If his bid is accepted the exporter would sell the contractual receipts forward thus trans- lating them into sterling. If between ECGD's quotation of the rate and acceptance of the bid, sterling has appreciated on the forward market, the sterling receipts will be reduced and ECGD would make good the difference, subject to a margin of 11% covered by the exporters. The Bank of England advises ECGD on the rates to quote and ensures that there is a forward market in which the exporter can sell his contractual receipts. Present Government policy limits the TTC scheme to covering the US dollar/sterling and Di/sterling risk as these are the only two currencies with a stable forward market.

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Metro-Cammell have made a bid in US dollars using the TTC scheme. Their US dollar price, however, when converted into HK dollars at current rates is too high. A number of ways of reducing it are being explored but there is likely to be some residual gap.

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sper

If ECGD were prepared to give TTC cover on the US dollar/HK dollar exchange risk and to set the conversion rate at a level specially chosen for the purpose, Metro-Cammell would be able to close this gap. This would of course, involve ECGD in indemnifying Metro-Cammell for any difference between the US dollars eventually realised from selling forward contractual receipts and the US dollars which would have been realised from the conversion rates set by ECGD.

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It is not possible at this stage to forecast how the forward exchange rates of Hong Kong/US dollars would move. With a rate set in the way described above, the expectation would be that the forward sale of the contractual receipts would not yield the required out-turn in US dollars and ECGD would have to make good the difference but it is not possible to estimate how large that might be. There is the further possibility that it might not be possible to sell the receipts forward at the date of contract, as the forward market in HK/US dollars is not large.

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dollars

To meet these two contingencies it is propose that the Bank of England should be instructed to use the E.E.A. to buy the forward contractual HK dollars receipts at specified minimum prices if no other buyer can be found at higher prices. The minimum prices would be calculated so that ECGD's cover would not involve them in an "unduly hazardous risk."

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The implication of this for the Bank is that it would involve it in dealing in forward HK dollar receipts which is not present practice and that there would probably be a financial loss of uncertain size of those dealings.

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