Deposit in currency A without concern of getting currency B at the agreed exchange rate at the delivery day, expecting high interest rate.
Client may: Have an expectation of the future exchange rate or combine with his own foreign exchange demand to choose the currency pair. If no currency exchanged at the delivery day, get a higher interest rate. If currency exchanged, and clients need currency B initiatly, get currency B with a better exchange rate than spot rate at the trade day.
If currency exchanged at the delivery day, and clients have to take some loss if they still need currency A.
An importer needs 1million EUR to pay for the raw materials one month later. Now EUR/USD is 1.20, and the importer expects EUR to keep depreciating, but not too much, and will buy at around 1.18. The traditional method is holding USD deposit in current account till the target EUR price although the USD deposit rate is quite low. Then the premium deposit is a better choice. The importer can deposit 1.18 million USD, features as followed:
|Trading Day： ||Quote Date|
|Value Day： ||Quote Date +2 Business Day|
|Delivery Day： ||Value Date +1 Month|
|Reference Day： ||Due Date -2 Business Day|
|Interest Rate： ||6.56%|
|Currency pair： ||EUR/USD|
|Spot rate： ||EUR/USD 1.2000|
|Strike Price： ||EUR/USD 1.1800|
|Principal & Interest Payment： ||2:00pm Beijing at reference day, the bank has the right to choose to pay off principal & interest either by EUR or USD.|
|Business Day： ||New York, London, Tokyo|