URY AEF DIV
CONFIDENTIAL
Р.3/4
2
The proposal is that individual officers five years before their retirement date could, at their own option, take out a five-year HKS can from HSBC, swap it into sterling which is placed on a fixed 5-year deposit with HSBC as collateral for the loan. loan is then repaid after 5 years with the commutable portion of the officer's HK$ pension paid by HKG or HKSARG and the officer sails off home to the UK with the sterling.
The HK$
The proposal, as already noted, as of fairly limited scope and has a number cf weaknesses. First, it of course only covers the exchange rate risk from the starting point of the loan, ie someone retiring in 2002 could only be locked into the exchange rate prevailing in 1997. I assume the expectation is that the HK$7.80 US$1 link will remain at least until 1997, so that the only exchange rate risk to be taken before then is that between sterling and the US$. Secondly, as noted in John Gray's letter of 11 September, it is not inconceivable that the HK$ could appreciate against sterling (look at what has happened in recent weeks), so that the HMOCS officer would be better off not doing anything. However, this would obviously have to be a matter of personal Judgment as to whether or not the officer feels it is worthwhile at the relevant time to exercise his option.
In this framework and within these limitations, the suggested scheme does appear to us to provide the requisite insurance and so would seem to be worthy of further investigation.
One of the possible problems identified is that the individual officer will have to meet the interest rate cost of the HK$ loan and that while at the moment this would be more than covered by the interest to be earned on the sterling collateral deposit, this may not always be the case. It is possible that an adverse interest rate differential of this sort, if it is not met out of the officer's own resources, could be covered, no doubt with a fee of some sort, by an interest rate swap. This might be worth exploring
with HSBC.
The main potential difficulty identified, however, is the need to top up the sterling collateral if during the validity of the loan
No comments yet.
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