-0.04
FRI 110V,
CIVIL SERVICE BRANCH
=53
=.35
613
PRIVATE AND CONFIDENTIAL
HKA
23311
Memo ts: Mr M.J.C. Waters
frem: Stan "ner
Re: Pension Safeguards Date: 13th November 1392
issue is how and at what cost could the sterling value of an Officer's prospective lump sum commuted pension be protected. There is no external quarantor.
As discussed = do not believe there is a practical and/or affordable solution. Conceptually the closest one might get is through the the use of currency forwards or options.
(a)
(3)
If the aim is to protact the sterling value of the lump sum against a strengthening of the pound, but to allow the Officer to gain if sterling weakens, then an option is required.
There is no market in HKD/sterling options. One would have to use USD/sterlinę options. A common option period is twelve months, so in the example the officer would affect every year for ten years a twelve month option to buy sterling at the then current price.
To start the process let us say the officer bought an option to buy sterling at today's price of USD1.5270 to the pound, exercisable on 15th November 1993. This would cost 4.08% of the target amount of HKD1,646,400. is is 12.7% of his annual salary! The cost of having the best of both worlds in currency fluctuations is very expensive as you can see.
The 4.063 figure would vary from time to time with the volatility of currency movements.
If the aim is only to protect the sterling value of the prospective lump sum and the officer is willing to give up the gains from a falling pound, then forward contracts would be the better answer.
ma Officer in the example would buy starling months forward every year for tan years selling the amount of the prospective HKD lump sum. In this case he could deal in Hong Kong dollars,
Forward prices are wholly governed by interest rate differentials which may work in the officer's favour. For example today one can buy starling 12 months forward at HKD11.605 to the pound compared to a "spot" price of HKD11.831, a gain of 1.958.
The problem however is that although collateral is not
3) E
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