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Foreign currency tunnel

Foreign currency tunnel

A tunnel is a strategy formed by the combination of two options with zero cost, which allows you to establish some fluctuation limits to the exchange rate, allowing you to benefit from favourable movements of the exchange and limiting your losses in the event of unfavourable movements.

 

1. Importer


If your company imports in USD, you will have to buy a set amount of USD at a future date. Exchange rate insurance guarantee you a fixed purchase price, regardless of the evolution of the EUR/USD exchange rate

Gráfico1

On the other hand, a tunnel allows you to take advantage of increases of the contribution of the EUR/USD up to a certain level (maximum rate), limiting your losses in the event of decreases up to another established level (minimum rate).

On maturity:

  • If EUR/USD < minimum rate: you will buy at the minimum rate (covers unfavourable scenarios)
  • If minimum rate < EUR/USD < maximum rate: you will be able to buy at the market price (enables you to take advantage of favourable movements)
  • If EUR/USD > maximum rate: you will buy at the maximum rate. The advantage of a tunnel is that you can take advantage of the favourable movement of the exchange rate, while limiting your losses in the event of unfavourable evolution.

 Gráfico2

2. Exporter


If your company is an exporter in USD, you will have to sell a determined amount of USD at a future date. An exchange insurance guarantees you a fixed sale price, regardless of the evolution of the contribution of the EUR/USD.

Gráfico3

On the other hand, a tunnel will allow you to take advantage of downturns in the payment of the EUR/USD up to a certain level (minimum rate), limiting your losses in the event of increases up to another established level (maximum rate).

On maturity:

  • If EUR/USD > maximum rate: you will sell at the maximum rate (covers unfavorable scenarios)
  • If maximum rate < EUR/USD < minimum rate: you will be able to sell at the market price (allows you to take advantage of favourable movements)
  • If EUR/USD > minimum rate: you will sell at the minimum rate

Gráfico4

The advantage of a tunnel is that you can take advantage of the favourable movement of the exchange rate, while limiting your losses in the event of unfavourable development.

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