FRI 13 NUV 92 097SL CIVIL SERVICE BRANCH
P6.04
852 537 1514
P.05
PRIVATE AND CONFIDENTIAL
Memo to: Mr M.J.C. Waters
From: Stan Vyner
Re: Pension Safeguards
Date: 13th November 1992
The 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 guarantor.
and/or
As discussed I do
I do not believe there is a practical affordable solution. Conceptually the closest one might get is through the the use of currency forwards or options.
(a). If the aim is to protect 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.
(3)
There is no market in HKD/sterling options. One would have to use USD/sterling options. A common option period is twelve months, so in the example the officer would effect 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. This 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 4.08% 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.
The Officer in the example would buy sterling 12 months forward every year for ten 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 forward at HKD11.605 to the pound compared to a "spot" one can buy sterling 12 months price of HKD11.831, a gain of 1.95%.
The problem however is that although collateral is not
No comments yet.
Private notes are available after approval.