TNAG-2674-FCO40-3871-Hong-Kong-garrison-withdrawal-plan-1993 — Page 35

Tatzoduction

Exchange Rate Fluctuation

9

Appendix

The quarterly invoices

presented to HKG by HQBF

Comprise a Sterling component and a HK$ component. Past practice was for HKG to buy Sterling in the spot market on the due payment date to cover the Sterling element. In mid

1992, an internal working group completed a study which

concluded that in

future HKG should buy forward at the time the draft Estimates were being prepared in order to fix the

cost of the Sterling component in HK$ terms for the coming financial year. It was intended the new arrangements would

be brought into effect in. December 1992 in respect

financial year 1993-94.

of

2.

Government

The exchange

rate

assumed for estimates purposes By the time of the first quarter

in 1992-93 was $13.5.

payment, the spot rate was $14.0275 and by the time of the

second quarter payment the rate was $14.9375. The pound then rose on the foreign exchange market to $15.5. Although there

was some speculative pressure against Sterling the British declared publicly that on no account would Britair leave the ERM and that whatever action was necessary would be taken to maintain the parity of the pound. In the light of

those public statements, HKG took advantage of a slight softening of the pound in the market, and the differential

interest rates, to bring forward the new arrangements to the

autumn of 1992. HKG contracted to buy forward at $14.53 for November delivery, and $14.3 for delivery in February 1993.

3.

sharply.

Britain then left the ERM and the pound declined

The prevailing spot market rate in mid-November

1992 was $11.83, and in mid-February 1993 was $10.96. Нас

HKG maintained its previous practice, $94.6 million would

have

been saved (assuming

paid in full).

(S342 p.8)

the

fourth quarter invoice were