Foreign exchange

Foreign exchange transactions in which one currency is bought or sold against payment in another currency at a specified rate with settlement taking place two business days later.

The two-day settlement process, commonly referred to as spot, is international practice due to differences in time zones and the time required by banks to ensure that settlement is done correctly. 

When urgent currency payments or receipts must be processed, one-day value or even same-day value exchange rates may be provided, depending on currency cutoff times.

FECs are contractual agreements between the bank and its clients to exchange a specified amount of one foreign currency for another at a predetermined exchange rate on a specified future date.

There are various types of FECs that can be used depending on your requirements:

• A fixed FEC can be used only on the specified maturity date.
• A partly optional FEC can be used within a prespecified period between two future dates.
• A fully optional FEC can be used at any time between the date of establishing the FEC and the specified maturity date.
• Long-dated forwards are FECs with a maturity date longer of than 12 months forward and are subject to prior approval of the Central Bank of Lesotho (CBL).

Swaps are the simultaneous purchase and sale of identical amounts of one foreign currency for another, but on two different value dates, either spot against a forward date or one forward date against another forward date.

• Early delivery (or pretakeup) swaps are used to bring forward the maturity date of an existing FEC.
• Extension (or rollover) swaps are used to extend the maturity date of an existing FEC to a later date.

Currency derivatives can also hedge exposure to exchange rate fluctuations, but are fundamentally different from FECs as the buyer of an option contract has the right, but not the obligation, to buy or sell a fixed amount of currency at a fixed exchange rate on a predetermined date in the future. The buyer can therefore choose the better exchange rate – either the prevailing rate in the market at the time, or the price specified in the option contract.

There are two main types of option contracts that can be used in various combinations to provide structured solutions to meet your hedging requirements.:

• With a call option the buyer has the right, but not the obligation, to buy the underlying currency at a fixed exchange rate on a predetermined future date.
• With a put option the buyer has the right, but not the obligation, to sell the underlying currency at a fixed exchange rate on a predetermined future date.