EASURY AEF DIV
CONFIDENTIAL
P.1
3
The question arises as to who would meet the cost of this top-up, the individual officer or for example HMG, or whether it could be mitigated by some form of external guarantee, eg again by HMG. In our view, a possible alternative way of dealing with this would be to reduce the risk of
With calls for top-up collateral through the use of derivatives.
the HK$ appreciated against sterling.
the HK$ linked to the US$, the recent depreciation of sterling against the HK$ was essentially the result of sterling's depreciation against the US$. On the assumption, therefore, that the HK$ will not appreciate against the US$ (because of the link), the risk of sterling depreciation and consequent calls for top-up capital could be managed with a sterling put option.
м
This would
give the holder the option (but by definition not the obligation) to sell sterling for US$ at a specified exercise price at or until a specified future date. This would have the effect of limiting the need for top-up collateral to the difference between the spot
There could therefore rate and the exercise price for the option.
- for top-up still be some need - but it would be a limited one collateral and there will be the additional cost of an arrangement fee, which will depend on the maturity and exercise price of the option. But overall it may be that the cost would be less than the need for top-up collateral.
One
I cannot pretend that we have looked into all the details of this, but in our view it might, again, be worth exploring with HSBC. important aspect of such an arrangement is that it should obviate the need for, ie it would be an alternative to, an external
guarantee.
I hope these thoughts are of some help.
бийст
Yours sincerely, Curi Gratar
C D Elston
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