PRODUCT DISCLOSURE STATEMENT - Jarden
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PRODUCT DISCLOSURE
STATEMENT
for Foreign Exchange Options, Deliverable Forward Foreign
Exchange Contracts and Margin Foreign Exchange
Contracts issued by Jarden Securities Limited
7th March 2021
This document provides important information about Foreign Exchange Derivatives to help you decide whether you want to enter into them.
There is other useful information about this offer at www.business.govt.nz/disclose
Many derivatives are complex and high-risk financial products that are not suitable for most retail investors. If you do not fully understand a derivative described in this
document and the risks associated with it, you should not enter into it. You can also seek advice from a financial adviser to help you make your decision.
You should ask if that adviser has experience with these types of derivatives.
Jarden Securities Limited has prepared this document in accordance with the Financial Markets Conduct Act 2013.
Version: Jarden01062020.FXDerivativesPRODUCT DISCLOSURE STATEMENT 1. Key information summary What is this? This is a Product Disclosure Statement (“PDS”) for Foreign Exchange Options (“FX Options”), Deliverable Forward Foreign Exchange Contracts (“Forwards”), and Margin Foreign Exchange Contracts (“Margin-FX”), together called “FX Derivatives” or “FX Contracts”, provided by Jarden Securities Limited (“Jarden”). FX Options are derivatives contracts between you and Jarden that give the buyer the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The value of the contract will depend on the value of the underlying currencies, the option’s strike price, the prevailing interest rate differential in the currencies, the term of the option and the volatility of the currencies. The contract specifies the terms on which those payments and deliveries must be made if the option is exercised. Forwards and Margin-FX are derivative contracts between you and Jarden that may require you or Jarden to make payments and deliver currencies at a specific rate on a specific date. The value of the contract will depend on the value of the underlying currencies. The contract specifies the terms on which those payments and deliveries must be made. WARNING Risk that you may owe money under the derivative: Risk that you may owe money under the derivative: If the value of the underlying currency changes, you may suffer losses. In particular, unlike most other kinds of financial products, you may end up owing significant amounts of money. You should carefully read section 2 of the PDS (key features of the derivatives) on how payments are calculated. Your liability to make margin payments: Jarden may require you to make additional payments in margin payments to contribute towards your future obligations under these derivatives. These payments may be required at short notice and can be substantial. You should carefully read section 2 of the PDS (key features of the derivatives) about your obligations. Risks arising from issuer’s creditworthiness: When you enter into derivatives with Jarden, you are exposed to a risk that Jarden cannot deliver a currency as required. You should carefully read section 3 of the PDS (risks of these derivatives) and consider Jarden’s creditworthiness. If Jarden runs into financial difficulty, the margin you provide may be lost. About Jarden Jarden is a 100% New Zealand owned and operated brokerage firm. Jarden advises and facilitates trades on a full range of financial products available in the foreign exchange, carbon, options, equities, contracts for difference and futures markets. Jarden Securities Limited | www.jarden.co.nz 2
PRODUCT DISCLOSURE STATEMENT
Which derivatives are covered by this PDS
This PDS covers FX Options, Forwards, and Margin-FX Contracts, together called FX Derivatives:
• Under FX Options, the buyer has the right but not the obligation to exchange money denominated in one currency
into another currency at a pre-agreed exchange rate on a specified date. The seller has an obligation to fulfil the
contract terms. FX Options carry limited risks for the buyer, but unlimited risks for the seller. The transaction must
take place at the expiry date if the option has been exercised.
• Under a Forward, the parties agree to a specific exchange rate for the purchase and sale of currency to occur at a
specific future date.
• A Margin FX contract replicates the risk and return profile of the underlying currency. No delivery occurs and the
contract is cash settled with margin paid and/or received based on the change in value of the underlying currency.
However, as Margin FX is a highly leveraged derivative, you have significantly greater risk than an investment in the
underlying asset.
FX Contracts are traded over the counter (“OTC”) between you and Jarden rather than through a recognised exchange
therefore are less regulated and therefore may carry greater risk. Jarden is the counterparty to each client position, so
you are entering into a derivative contract with Jarden, either by trading via telephone to Jarden’s dealing desk or direct
to market by using Jarden’s on-line trading platform.
These are private transactions that can be specifically tailored to the investor’s needs, which allow investors to manage
exchange rate risk; especially for foreign currency denominated transactions that you know will take place at a specific
date in the future. Each contract allows the investor/trader to speculate on exchange rate movements in a pre-set size
depending on their needs.
Jarden Securities Limited | www.jarden.co.nz 3PRODUCT DISCLOSURE STATEMENT
Table of Contents
This PDS contains the following sections:
1. Key information summary ................................................................................................................................................................. 2
What is this? ................................................................................................................................................................................................ 2
WARNING ....................................................................................................................................................................................................2
About Jarden ................................................................................................................................................................................ 2
Which derivatives are covered by this PDS ................................................................................................................... 3
2. Key features of the FX derivatives ................................................................................................................................................. 5
Entering a derivative and rights to alter terms or terminate ......................................................................................... 15
3. Risk of these derivatives ................................................................................................................................................................. 18
Product risks ............................................................................................................................................................................................. 18
Issuer Risks ............................................................................................................................................................................................. 19
Risks when entering or settling the derivatives ................................................................................................................... 19
4. Fees ............................................................................................................................................................................................................ 20
Applicable fees and charges for these products ................................................................................................................ 20
5. How Jarden treats funds and property received from you ............................................................................................ 21
6. About Jarden .................................................................................................................................................................................23
7. How to complain ...................................................................................................................................................................................... 24
8. Where you can find more information ...................................................................................................................................... 25
9. How to enter into client agreement ........................................................................................................................................... 26
10. Glossary of common trading terms ............................................................................................................................................ 27
Jarden Securities Limited | www.jarden.co.nz 4PRODUCT DISCLOSURE STATEMENT 2. Key features of the derivatives Key features of Foreign Exchange Derivatives Foreign exchange (“FX”) is a term to describe the trading of currencies where one person buys a currency in exchange for another currency. Quotes for FX are for a currency pair, for example, NZD/USD. The first currency (NZD) is known as the base currency and the second currency (USD) is referred to as the quote currency. The price represents how much of the quote currency is needed for you to get one unit of the base currency. For example, NZD/USD 0.7500 means it takes 75 US cents to buy $1 NZD. Most currencies’ exchange rates are floating (they are not fixed or pegged at a particular level) and fluctuate according to the forces of supply and demand. At Jarden, we can provide you with FX Derivatives quotes through our 24 hour dealing desk, or through our electronic on- line platforms. What is a Foreign Exchange Option? An FX Option is a type of derivative used in FX trading and is a contract between you and Jarden that gives the buyer of the FX Option the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The contract specifies the terms on which those payments and deliveries must be made if the option is exercised. Example A company may buy an FX Call Option giving them the right to buy USD $1m six months from now at a NZD/USD rate of 0.7600, rather than at today’s spot exchange rate of 0.7550. The buyer will pay a premium to gain this right. Note that hedging this exchange rate using a FX Option means that the company, as the buyer, does not need to exercise the option and will receive the benefit of rate movements in their favour while providing a worst case buy level. What is a Forward? A Forward, is a type of derivative used in FX trading and is an agreement to exchange and deliver a specific amount of one currency into another currency at a specific rate on a future date. Their value depends on the value of the underlying asset, which in the case of FX Forwards is the underlying spot currencies. A deliverable Forward means that upon the maturity date of the contract, the client physically changes the two agreed currencies at the agreed price of the Forward. For example, a USD/NZD Forward will result in the client changing USD for the NZD equivalent. What Is a Margin FX Contract? A Margin FX contract is a form of derivative used in FX trading and is an agreement derivative to buy one currency and sell another currency. Their value depends on the value of the underlying asset, which in the case of Margin FX, is the underlying spot currency. Jarden Securities Limited | www.jarden.co.nz 5
PRODUCT DISCLOSURE STATEMENT
Margin FX contracts are a highly leveraged derivative where no delivery occurs as the contract is cash settled on the
settlement date, with margin paid and/or received based on the value of the underlying currency. As foreign exchange
rates fluctuate, the revaluation of FX Margin contracts can result in unrealised gains and losses. These may be realised
by liquidating (closing out) your positions.
Margin FX orders can be placed at market (underlying price), limit (a favourable specified trading level) or to close out a
position, a stop-loss (an unfavourable specified trading level to prevent further losses).
Example
Jack is a currency speculator who has an Jarden cTrader Margin FX account with a balance of NZD $20,000. He
believes that economic news due to be released in 15 minutes will adversely affect the NZD/USD exchange rate.
He decides to sell NZD/USD $100,000 on OMF’s cTrader platform at the current rate of 0.7500 thinking that the NZD
will depreciate against the USD.
10 minutes after the news was released, the NZD drops 30 pips (points) to 0.7470. Jack decides to close out the trade
by buying NZD/USD $100,000 at 0.7470 realising his profits.
Why Should an Investor consider FX Options?
Investors often need to exchange foreign currency at some future date. Most currency exchange rates are floating (they
are not fixed or pegged at a particular level) and fluctuate according to the forces of supply and demand.
The main reasons for engaging in FX Options are:
• FX Options give you flexibility when hedging to limit the potential risk of fluctuating exchange rates. It provides the
ability to fix an exchange rate now for the future delivery of a currency. This certainty of the amount payable on the
future date provides improved money management of cash flows and costs.
• Unlike other FX derivatives, bought FX Options limit the loss of the buyer of the option to the premium, therefore
there is certainty regarding the level of loss that the client can face.
• For speculative profits (investors predict whether a currency will devalue or increase in value against another
currency over a period of time).
• They can be tailor-made for the particular risk that an investor wants to cover or speculate on.
• It is a simple way of managing future currency exchange risk by providing a worst case rate if there are any
unfavourable movements in exchange rates. But unlike forwards they allow you to benefit should the exchange rate
move in your favour.
How are FX Options Calculated?
The premium of an option is made up of two separate components: the intrinsic value and the time value (extrinsic value).
The intrinsic value is the difference between the spot price (exchange rate) and the exercise price. For a call option, the
intrinsic value is the spot price less the exercise price, while for a put option it is the exercise price less the current share
price. In other words, only in-the-money options have any intrinsic value.
The time value for an option is made up of time to expiry, volatility and interest rates. An option which is out of the money
(not profitable to exercise) has no intrinsic value but still has a time value because there is a chance it will become
profitable before it expires. The more likely the option will become in-the- money, the higher the premium. In-the-money
options have time value and intrinsic value.
Jarden Securities Limited | www.jarden.co.nz 6PRODUCT DISCLOSURE STATEMENT
Therefore, the premium will depend on the value of the underlying currency, the option’s strike price, the prevailing
interest rate differential in the currencies, the term of the option and the volatility of the currencies. Of these factors,
future volatility is the unknown variable, is not constant and is what is being traded.
How are FX Option Price Quotes Expressed?
FX Option prices are usually quoted in ‘Pips’—points—based on the underlying currencies and how the FX Option is
calculated as per above. Therefore each FX Option is individually priced. To request a price for an FX Option, clients can
call Jarden’s dealing desk.
Why Should Investors Consider Forwards?
During trading hours, the exchange rates of major currency pairs can change by the millisecond, thus creating an
unpredictable environment for businesses exposed to foreign currency. A Forward eliminates this volatility by ‘locking
in’ an exchange rate today (derived from the current spot rate) for a transaction to take place in the future. Each party to
a Forward has an obligation to deliver the named currency at the date of expiry, therefore ensuring certainty as to a price
at a given time.
The main reasons for engaging in Forwards are:
• Hedging to limit the potential risk of fluctuating exchange rates as it is a simple way of managing future currency
exchange risk, thus negating any unfavourable movements in exchange rates.
• They can be tailor-made in structure for the particular risk that an investor wants to cover.
• It provides the ability to fix an exchange rate now for the future delivery of a currency. This certainty of the amount
payable on the future date provides improved money management of cash flows and costs.
• Forwards issued by Jarden can be pre-delivered (the investor gets “delivered” the currency in which they are
hedging) or extended to another date in the future at the discretion of the client.
Example: NZ Sport Limited
A New Zealand business, NZ Sport Limited, imports sporting equipment from its suppliers in the United States for
subsequent on sale to customers in New Zealand.
This means that its invoices from its US suppliers will be in US dollars (USD), but the income generated from its
business will be in New Zealand dollars (NZD).
NZ Sport Limited is due to pay a bill of USD $100,000 in three months. The current NZD/USD rate is 0.7518 therefore if
it converted NZD to USD today it would pay NZD $133,014.10 with this rate. But NZ Sport Limited does not want to pay
the bill today; it wants to pay in three months.
This leaves it with the question of what if the NZD depreciates against the USD?
A small change to the rate to 0.7500 (otherwise described as an 18 point depreciation) would increase this cost by
NZD $319.23. This would increase the bill to NZD $133,333.33.
This may seem insignificant, but NZ Sport Limited imports USD $10m of goods per year and this 18 point depreciation
would equate to a cost increase of nearly NZD $32,000.
Jarden Securities Limited | www.jarden.co.nz 7PRODUCT DISCLOSURE STATEMENT
How Are CFDs Price Quotes Expressed?
Because exchange rates change continuously, but changes in interest rates occur perhaps daily, Forward prices are
usually quoted as the difference in ‘Pips’—Forward points—from the current exchange rate.
Currencies are either described as trading at ‘discount’ which means that they have a higher interest rate on the
Forward market; or trading at ‘premium’ where the currency has a lower interest rate on the Forward market.
Forward points are calculated as follows:
Forward Points = Forward Price - Spot Price
You simply subtract the Forward points from whatever the spot price happens to be when you make your
transaction.
To request a price for a Forward, clients can call Jarden’s dealing desk or place a request for a quote on Jarden Fx24.
Example
In our above example of trading NZD/USD, the NZD has the higher interest rate currently offered by the New Zealand
Reserve Bank at 3.5% compared to the US rate of 0.10%, so the NZD will be trading at a discount in the Forward market.
With a current exchange rate of NZD/USD = 0.7518 and a Forward rate of 0.7419, the Forward points would be:
Forward Points = Forward Price - Spot Price
0.7518 – 0.7419 = 0.0099 or commonly known as “- 99 Pips”
Why Should Investors Consider Margin FX?
The exchange rates of major currency pairs can change by the millisecond, thus creating an unpredictable environment
for anyone exposed to foreign currency. Investors often wish to speculate on the movement in currency rates therefore
exposing themselves to this risk.
Margin FX is one of the key derivatives used by speculators for this purpose. Indeed, in the past the smaller trader had no
direct access to this market apart from buying/selling spot currency through their Bank. Margin FX allows smaller
investors, leveraged access to the global FX markets.
The main reasons for engaging in Margin FX with Jarden are:
• To gain exposure directly to international currency markets and interbank liquidity utilising a small deposit known
as initial margin.
• They are highly leveraged so the speculator can gain greater positioning power (exposure) to the currency market.
• They are purely speculative.
• They are non-deliverable, so the speculator does not need to deliver or take delivery as is the case in spot foreign
exchange and other FX derivatives that Jarden may offer.
• Jarden offers Margin FX through two trading models: directly through Jarden’s dealing desk and Jarden’s
electronic trading platform, Jarden cTrader.
Jarden Securities Limited | www.jarden.co.nz 8PRODUCT DISCLOSURE STATEMENT
How Are Margin FX Contracts Calculated?
The investor knows the current market rate for currencies, which is known as the “spot price” or “spot rate”.
Margin FX rates are a true reflection of this spot rate so are continuously changing.
When trading Margin FX, clients wish to know how to calculate the profit or loss on their position to make the
decision as to when (and if) they should close it out.
Margin FX is a leveraged product, which means that clients can trade larger notional values, but with a lower
deposit (margin).
Using Jarden cTrader the current standard leverage is 25:1 which equates to a 4% [margin over the entire
position traded/held. This means that if you have exposure to NZD/USD $100,000, the minimum amount of
upfront deposit (the initial margin) is NZD$4,000.
The margin for trading through Jarden’s dealing desk is often higher at up to 4% and is subject to change given
market conditions over the entire position traded/held which means that if you have exposure to NZD/USD
$100,000, the initial margin is NZD$3,000.
The initial margin rates on both the Jarden cTrader and through Jarden's dealing desk will vary depending on
the volatility of the underlying currency and the client profile. They are also subject to change by Jarden at any
time.
So, when clients wish to trade Margin FX, they need to consider their margin requirements to understand their
true profit or loss on a position.
Example
Let’s revert back to the example of Jack above. Remember Jack is a currency speculator who has a Jarden cTrader
Margin FX account at Jarden with a balance of NZD $20,000.
He believed that economic news due to be released in 15 minutes will adversely affect the NZD/USD exchange rate.
He decides to sell NZD/USD $100,000 on Jarden’s cTrader platform at the current rate of 0.7500.
The standard leverage on Jarden cTrader for the NZD/USD is 25:1 which means that Jack has to maintain a 4% initial
margin over the position traded / held.
Excluding any costs and commissions, Jack’s account will be as follows:
Current balance NZD $20,000
Position: Short $100,000 NZD/USD at 0.7500
Margin deducted NZD $4,000
Balance available NZD $16,000
10 minutes after the news is released, the NZD drops 30 pips (points) to 0.7470. Jack decides to close out the trade by
buying NZD/USD $100,000 at 0.7470.
The realised P&L shows that Jack has made 30 pips or USD $300 variation margin profit (converted @ 0.7470 to NZD
$401.61)
Upon closing the trade, the initial margin used to hold the trade and the variation margin profit are credited back to
Jack’s account. Jack’s account balance has increased and is now NZD $20,401.61
Jarden Securities Limited | www.jarden.co.nz 9PRODUCT DISCLOSURE STATEMENT
Holding Margin FX Overnight and Swaps
Typically Margin FX is traded same day (otherwise known as day trading) however, clients are able to hold
trades overnight and on an indefinite basis.
If Margin FX is held overnight, clients are subject to a holding cost / roll or credit, which is based off the
overnight Swaps or the interest rate differential of the two currencies that they are trading.
It is important to note these rates are susceptible to Official Cash Rate (“OCR”) adjustments or monetary policy
(“MPS”) announcements and that there are three (3) day Swaps or rolls every Thursday morning (NZST/NZDT)
to coincide with the close of the 5pm Wednesday New York trade day.
The calculation method for Margin FX at Jarden is the same, however, it is expressed differently depending on
whether the contract is traded through Jarden’s telephone trading service or Jarden cTrader.
As a general rule of thumb, if you are ‘long’ the high yielding currency, you will receive the benefit for it and if
you are ‘short’ the high yielding currency, you will be required to pay the cost on any Margin FX contracts
traded by Jarden’s dealing desk. See section 4 of this PDS on interest and deficit interest fees and charges.
On Jarden’s cTrader platform, the Swap rate is calculated and then deducted off the gross profit/loss figure to
form the net profit/loss figure, which is quoted to the client.
Example: Calculating the cost of trading for Jack
Jack has agreed to pay a commission rate of 0.01% to trade Margin FX on Jarden’s cTrader platform:
Current Balance NZD$20,000.00
Position Short $100,000 NZD/USD at 0.7500
Commission charged $10
Margin deducted as required NZD $4,000
Let’s say Jack does not close out after 10 minutes but holds the position until (at least) the next day
The current Swap rates are: -1.06/0.60
Therefore, as Jack is short NZD, his Jarden cTrader account will have a debit of USD $10.60 (automatically
converted at ‘spot’ to the home currency of the account)
Spot @ 0.7500 NZD $14.13 Dr
and noted clearly in his ‘positions’ tab under ‘Swap’.
Current balance NZD $15.975.87
On the second day Jack notices the NZD has dropped 100 pips or 1c to 0.7400. He decides to close out the
trade. Our ‘Gross realised P & L’ shows that he has made USD $1,000 (converted to NZD $1,351.35 @ 0.7400)
Upon closing the trade, the initial margin used to hold the trade is credited back to Jack’s account (NZD
$4,000). Jack will be required to pay the closing commission to exit the trade (of equal value to the opening
commission when he opened the trade of NZD $10). This is clearly noted in his ‘positions’ tab under ‘Closing
Commissions'
Jarden Securities Limited | www.jarden.co.nz 10PRODUCT DISCLOSURE STATEMENT
Therefore Jack’s ‘Realised P & L’ is simply the gross profit less any Swap and commission charges:
Opening Balance NZD $20,000.00
Profit NZD $1,351.35
Less commission(s) cost NZD $20
Less total Swap cost NZD $14.13
Jack’s balance after trading NZD $21,317.22
How Are Margin FX Price Quotes Expressed?
Margin FX quotes are expressed in currency pairs; the base currency and the quote currency and as a bid or offer as
to whether the client wishes to buy or sell the base currency.
For example, going short $100,000 NZD against the USD would be expressed as:
NZD/USD Sell $100,000
Margin – FX Contracts
Clients who wish to trade FX derivative contracts with Jarden are required to post funds into their account, called
margin, or in the case of a buyer of an FX option, a premium. The buyer pf an option must pay the premium owed,
plus any applicable fees when they establish a position. The option’s seller will receive premium upfront but will pay
a margin.
Margin at Jarden consists of two types of margins: the initial margin and the variation margin.
The margin is a calculated percentage of the transaction rather than the full cost of the sum required and is generally
1% to 15%, depending on volatility, of the notional face value.
Initial Margin
An initial margin is the amount of money that is required to be deposited for each contract that you have open and
covers the credit risk that you pose to Jarden. This is held as security against adverse price movements in the
market. It is important to note that the initial margin represents the minimum amount of money that Jarden must
collect from its clients.
Initial margins are calculated by currency pairs and may vary.
For example, on a $1m NZD/USD position the seller of a 0.7600 strike call or put option will pay 5% of USD$760,000
or USD $38,000 initial margin plus any applicable fees and commissions.
Often more than this initial margin amount is required to ensure sufficient funds are held in clients’ accounts to cover
any adverse movements in the price (variations).
Your Jarden dealer can advise you of your initial margin or premium requirements for any FX Derivatives you wish to
trade.
Variation Margin and Margin Calls
Variation margin is the term used to describe the change in the market price of the FX Derivative contract that has an
impact on the amount of funds that are required to be held in a client’s Jarden trading account.
Variation margin doesn’t impact on buyers of FX Options who pay a fixed premium at the time of entering into the
option.
Jarden Securities Limited | www.jarden.co.nz 11PRODUCT DISCLOSURE STATEMENT
Every day, market price of the contract, is revalued against the spot price of each relevant instrument (mark-to-
market) and the unrealised profit/loss is determined in respect of those positions.
If the market moves in your favour, the resulting unrealised profit (surplus) variation margin is added to the equity
of your account. In this scenario you will be ‘in the money’, which will be realised when you close the position. In
this scenario you will be ‘in the money’ and not on margin call. You can use surplus variation margin to increase
the size of your position.
If the market moves against you (negative price movements) and your account holds insufficient funds, you will
either be:
• ‘margin called’ if your FX derivatives position traded through Jarden’s dealing desk. In this case you will be
required to supply additional funds (usually within 24 hours) to bring your account balance up to its required
minimum. Should the market continue to move adversely, you will continue to be ‘margin called’ to maintain
the required variation margin; or
• automatically closed out if you hold a position on Jarden cTrader. Margin calls are only available on Margin
FX positions traded through Jarden’s dealing desk as Jarden’s cTrader has a system based automatic close
out function
Jarden’s margin calls are calculated in the base currency of the account and are calculated by:
Margin requirement = Initial margin & variation margin.
Margin calls are normally made at the beginning of the day for FX Derivatives, but can be made at any time. In
extreme market volatility have intra-day margin called clients – any time of day. You will be contacted by a Jarden
dealer by phone, text or email to advise you of your margin call, or by a daily statement transmitted electronically to
your notified email address.
In the event of a margin call you will be asked to either close out the position or send additional funds to cover the
margin call. It is your responsibility to maintain current margin requirements on your position and meet your margin
call within 24 hours (or such earlier time as may be notified by us under our General Terms and Conditions). Failure
to do so will result in Jarden closing your position and you will remain liable for any costs or losses.
If you are travelling overseas, you should advise Jarden as you may have up to 48 hours to meet your margin call.
However, if you cannot be contacted Jarden may be forced to close all or some of your positions.
You are required to ensure that you or an authorised person are always able to be contacted for instructions at any
time, even when travelling. Accordingly, we strongly suggest that if you know that contact may be difficult, then
you make alternative arrangements for payment in the event of a margin call.
Jarden Securities Limited | www.jarden.co.nz 12PRODUCT DISCLOSURE STATEMENT
Example 1: Margin Call – FX Option
A trader has transferred to their Jarden account NZD $10,000. They sell a three month NZD/USD FX vanilla 0.7500 put
option with a face value of USD $100,000. Based on a spot rate of NZD/USD 0.7640 the three month European put is
trading at 160 pips or USD $1,600.
This means that the seller will receive USD $1,600 less NZD $100 in commission in their account at Jarden at inception.
The initial margin is 5% or USD $5,000.
So the account would have the following:
NZD USD Base Equivalent
Deposit 10,000.00 CR 10,000.00 CR
Premium 1,600.00 CR 2,094.24 CR
Commission 100.00 DR 100.00 DR
Initial Margin 5,000.00 DR 6,544.50 DR
Overall Net Balance 9,900.00 CR 3,400 DR 5449.74 CR
The account has an excess balance of NZD $5,449.74 on day 1 as above.
Additional margin will be deducted from the account should the spot NZD/USD fall below the 0.7500 strike.
As this calculation occurs daily, it is appropriate to lodge excess funds in their account to cover daily margin calls, so
having an excess balance as per this example is the norm.
Example 2: Unlimited Overloss – FX Option
As per the FX Option example above, George has a credit balance of NZD $5,449.74.
Should the NZD/USD fall 41 points or more below the 0.7500 strike, additional margin will be payable (i.e. 41 points at
USD $100 points is USD $4,100 @ 0.7460 = NZD $5,495.98 which exceeds the NZD $5,449.74 balance).
If the client does not pay variation margin, then the FX Option will be closed out and any losses (plus costs) would be
deducted from the initial margin held.
Overloss occurs when the initial margin is less than the variation margin call. The client is liable for the overloss.
Do Forwards Work as a Trading Strategy?
Forwards can effectively work as a trading strategy for people who wish to hedge their risk of currency fluctuations
over a given period of time and guaranteed Forward rates can be extremely important.
Jarden Securities Limited | www.jarden.co.nz 13PRODUCT DISCLOSURE STATEMENT Example: Using a Forward to hedge currency risk for NZ Sport Limited NZ Sport Limited knows that in 90 days’ time it has to pay a bill of USD $100,000. The spot rates of the NZD/USD have been particularly volatile. Today’s spot rate of NZD/USD is quoted as 0.7518. As in the example above, Jarden can offer a Forward rate of 0.7452. This may seem like a poor rate as it’s less favourable than today’s rate, however, NZ Sport Limited is aware that over the previous couple of months the spot rate has been as low as 0.71 and high as 0.78. NZ Sport Limited decides that it wishes to go ahead with the Forward and lock in a guaranteed rate of 0.7452. This means that it knows it will only require NZD $134,192.16 to pay this bill as it has given itself certainty and “hedged” the currency risk. If the date of expiry occurs and the spot rate is 0.7250, NZ Sport Limited would have locked in a more favourable rate than the open market rate. Spot rate at 0.7250 = NZD $137,931.03 Forward rate at 0.7452 = NZD $134,194.25 This is a saving of NZD $3,736.78 for NZ Sport Limited. However, if the spot rate increased to 0.78, NZ Sport Limited would have locked in a less favourable rate than the open market. Spot rate at 0.78 = NZD $128,205.13 Forward rate at 0.7452 = NZD $134,192.16 This is an additional cost of NZD $5,987.03 for NZ Sport Limited. In this instance, NZ Sport Limited could purchase NZD/USD at the spot rate and cover the difference this way. It should be noted that although hedging provides certainty of the Forward rate, it also eliminates any potential profits should the currency appreciate in favour NZ Sport Limited in the example above. How Does Margin FX Work as a Trading Strategy? Margin FX are highly volatile derivatives and may be used as a trading strategy for people who wish to trade currency fluctuations rather than people who wish to trade for other purposes (such as hedging risk). There is no certainty in trading Margin FX, therefore investors should think carefully about their view on the market and the size of the contract (and the risk) they are willing to take in trading these products. If your view is that the base currency will appreciate, you will buy the Margin FX contract in the size suitable to your risk appetite. If your view is that the base currency will depreciate, you will sell the Margin FX contract. Please note that the examples provided above are for illustrative purposes only. They are each an example of one situation only and do not reflect the specific circumstances or the obligations that may arise under a derivative entered into by you. Jarden Securities Limited | www.jarden.co.nz 14
PRODUCT DISCLOSURE STATEMENT Entering an FX Derivative Contract and Rights to Alter Terms or Terminate The process below is a summary only of how to trade FX Derivatives with Jarden. Jarden’s General Terms and Conditions provide more detailed information about the obligations and rights of each party. Establishing an Account with Jarden To enter into an FX Derivative contract with Jarden you must become a contracted client of Jarden. Upon account opening, you will decide whether you wish to open an online trading facility, e.g. Jardenx24, or Jarden cTrader, as well as having access to Jarden’s dealing desk and traditional phone broking model. During Jarden’s account opening process, you must provide Jarden with (at a minimum) the information that is required in the Client Application Form. From time to time, Jarden may request further information to be provided by you to assist with the account opening. Once your account has been opened and funds deposited, your client advisor will provide an account number and a direct dealing telephone number to you. You will then be ready to deal. Jarden does not offer discretionary services for FX Derivatives, which means all orders must be authorised by you (or a person authorised to trade on the Account) prior to arranging the FX derivatives contract. Once an account is approved, you become a client and you will be able to enter into an FX Derivatives contract by instructing an Jarden dealer or placing an order via one of our online trading platforms. How to Enter Into a FX contract To place an FX Option order, you will request that Jarden dealer to provide a quotation for: a) The currency pair b) The expiry date of the option including whether it is a Tokyo or New York cut-off c) The strike price/s d) The options type – put or call e) European or American f) Features – vanilla, one-touch, KO, RKO, etc g) whether you are buying or selling the base currency To place an FX Forward order, you request that a Jarden dealer or Jardenx24 provide a quotation for the price at which you may enter a Forward by nominating: a) The currency pair b) The value date of the Forward c) whether you are buying or selling the base currency To place a Margin FX order, you request that a Jarden dealer or Jarden cTrader provide a quotation for the price at which you may enter a Margin FX contract by nominating: a) the currency pair; b) the amount of the Margin FX contract; and c) whether you are buying or selling the base currency If the quote is agreeable to you, you may immediately upon receiving the quote, instruct us to arrange the entry into the FX Contract. This can be done verbally via the Jarden dealer, or electronically via an online platform depending on where the quote was provided. Jarden uses a number of highly reputable counterparties (usually well-known international investment banks) to obtain FX Derivative pricing for our clients. At this point, Jarden will use our best endeavours to facilitate this contract on your behalf, however, Jarden has no obligation to accept your offer to enter into that contract and it only becomes binding when the contract is accepted by Jarden (i.e. traded). Jarden Securities Limited | www.jarden.co.nz 15
PRODUCT DISCLOSURE STATEMENT You must, amongst other things, ensure that you have enough cleared funds available in your Jarden account to cover the premium and/or initial margin of that FX Derivative contract and you are trading within any limits set by Jarden. When the FX Contract Is Confirmed If you have placed a market order the deal will be confirmed verbally by the Jarden dealer, or electronically via the applicable on-line platform. If the order is a limit, stop or some other order type and your order is filled, you can instruct Jarden to send a text or email on fill. In all cases upon acceptance of the FX Contract by Jarden, your order is filled and forms a legally binding contract. You will receive a deal confirmation which details the terms of the contract agreed in a written confirmation, or electronically. Confirmation of all trading activity is normally sent by email on the business day following the transaction in the form of a daily statement. The daily statement lists all open positions, with each position valued at the prevailing market rate. The current profit or loss on each position is also shown on the right of the page. Your net position is simply the result of summing the unrealised profits and losses of all open positions. The financial section outlines your cash balances, cash flows, initial margin requirements, unrealised profits/losses and the resulting equity. This is detailed by currency and summarised in your account’s base currency for convenience. For trading via Jarden cTrader, you can view your live positions 24 hours a day, otherwise you have the ability to download a transactional statement via the online portal. It is vital that you contact us as soon as possible if you do not receive a statement or if you disagree with its contents. You may wish to convert your individual currency account balances from time to time. Altering or Terminating FX Contracts There are different ways to alter or terminate an FX contract, depending on the type of contract: Altering or terminating an FX Option: Typically FX Options will either be exercised or expire worthless at the date of expiry rather than being altered or terminated. If an FX Option expires worthless, effectively nothing happens. This means that the client will lose their premium and the option will ‘disappear’ or cease to exist. The client does not need to do anything; the FX Option will automatically be removed from their Jarden account statement after the option has expired. If the FX Option is exercised, then this will automatically be transferred into a spot foreign exchange position. You will have to advise Jarden if you wish to deliver the FX position or roll the margin position forward to a date in the future. If you wish to deliver the FX position, you will advise Jarden (through your Jarden dealer) of this and the position will be settled within 2 business days (spot). If you wish to roll the position, you will agree to an FX Margin contract, being one as described elsewhere in this PDS. You should be aware that Jarden does not offer cash delivery of FX Options (unless this forms part of the FX Option quote). Should you wish to alter or terminate the terms of the FX Option before the option expires, you must advise Jarden. You cannot effectively ‘terminate’ an FX Option, you can, however, request that Jarden quotes for another FX Option which will effectively neutralise the risk of your option. If this occurs, then at the time of the requested sale, Jarden will calculate at the prevailing option price and may require additional margin. Any profit or loss will be credited/debited to your Jarden account. Jarden Securities Limited | www.jarden.co.nz 16
PRODUCT DISCLOSURE STATEMENT
Altering or Terminating a Forward
Should you wish to alter or terminate the terms of a Forward, you must advise Jarden. You can pre-deliver, partially
pre-deliver, extend or close out a forward.
Altering the Forward
On your instruction Jarden can:
• Pre-deliver the entire Forward prior to maturity. For example, NZ Sport Limited has a 90 day Forward at 0.7452
and wants to deliver the contract early. Jarden calculates the interest rate benefit to deliver the contract early
and adjusts the Forward rate to the contract. The contract is now due today at say 0.7515. The client delivers
the contract by paying Jarden NZD and providing USD payment instructions (i.e. receiving USD).
• Partially pre-deliver the Forward prior to maturity. As above but can be done for only part of the contract with
the remaining part being left until the original maturity.
• Partially deliver the Forward at maturity. For example, NZ Sport Limited’s bill payable has reduced to USD
$80,000, so they deliver NZD and buy USD at the original rate of 0.7452. The remainder can be rolled to a
new forward date or closed at market.
Closing Out and/or Terminating the Forward
You cannot effectively terminate a Forward, however, you are able to “close out” your position by pre-delivering
your Forward (see above). If you wish to close your Forward, you should advise Jarden who will provide you with a
quote which will be calculated on the value of the contract today.
If you wish to proceed, this will close the contract at market rates and any profit or loss will be credited/ debited to
your Jarden account.
Altering or Terminating a Margin FX Contract
Should you wish to alter or terminate the terms of your Margin FX contract you must advise Jarden. You cannot
effectively alter a Margin FX contract, but you can “close out” all, or a partial amount, of your position by advising
Jarden through your Jarden dealer or Jarden cTrader.
Closing out your Margin FX position will close the contract at market rates and profit or loss will be credited/debited
to your Jarden account.
Settlement of Margin FX will always be cash settled; however, the timing of settlement will differ depending on
whether the contract is traded via Jarden’s dealing desk or via Jarden cTrader:
• Jarden’s dealing desk will settle ‘spot’ (i.e. in 2 days)
• Jarden cTrader will settle instantaneously
Clients who trade via Jarden’s dealing desk will be able to view on their daily statements a ‘Value Date’, which is the
date in which the Margin FX contract will be cash settled. This changes on a daily basis depending on how long
the contract is kept open for.
General
As part of the agreement between Jarden and you (“Agreement”); either party may terminate the Client Agreement
at any time by giving the other notice in writing to that effect. Termination will be effective upon receipt of the
notice by the other party. Upon termination of the Agreement, all FX Contracts will be closed out or abandoned.
Jarden Securities Limited | www.jarden.co.nz 17PRODUCT DISCLOSURE STATEMENT 3. Risks of these derivatives Derivatives are often described as high-risk investments as their value is determined by an underlying asset, which in the case of FX Derivatives, are currencies. This section outlines the material risks in dealing in FX Derivatives. You should therefore consider these risks very carefully to decide whether FX Derivative contracts are suited to your investment, trading or hedging requirements. You should also be aware of the differences in risks if you are the buyer of an option or a seller of an option. Product Risks FX Derivatives carry a high degree of risk as exchange rates fluctuate, the leveraged nature of the facility will cause significant variations in the value of your position as you are only required to fund the initial and variation margins of the FX Derivative rather than the full face value. These fluctuations can work in your favour or against you. However, if you have entered into a Forward you are locked into a forward rate and will not benefit from any subsequent favourable exchange rate movements. It is important to understand that if you sell FX Options, or deal in Forwards or Margin-FX, major currency shifts can result in unlimited losses on your position that exceed your posted margin, resulting in additional variation margin to be paid, which have the potential to bring your Jarden account balance into negative equity. This risk is different for buyers of FX Options. FX Options buyers’ risk is limited to the premium payable at the establishment of the FX Option. However, to many professional traders the cost of option premiums may seem expensive, so they would prefer to receive the benefits of accurately predicting the market direction without paying out any premium and would therefore use forwards or margin FX to achieve their desired outcome. Margin call risk If you are trading Margin-FX electronically via Jarden cTrader, the unrealised profit/loss is continually changing in respect of those positions. Where an unrealised loss erodes all of your balance above the initial margin required, Jarden cTrader will automatically close out your position, without the need for any margin call. Should you hold more than one position on Jarden cTrader, the largest position will be automatically closed out first as it will free up the greatest margin. Accordingly, margin call risk is only applicable to FX Options sellers, and to Margin-FX and Forwards traded via Jarden’s dealing desk. Every day, the entry price or strike price of your position is compared to the spot or forward price of each relevant instrument (marked-to-market) and the unrealised profit/loss is determined in respect of those positions. Where an unrealised loss erodes all, or part, of your initial margin, you will be required to supply additional funds (usually within 24 hours) to bring your account balance up to its required minimum. Should the market continue to move adversely, then you will continue to be ‘margin called’ to maintain the required margin: this is called the ‘variation margin’. Should you fail to make a payment for additional margin or provide security when due, your position is considered to be in default. In this situation Jarden is able to without limitation: terminate your agreement, close your position, debit damages from your account of an amount equal to any realised loss and take such other actions as a reasonably prudent derivatives broker would take in the circumstances to protect the personal obligations incurred when dealing on your behalf. Jarden Securities Limited | www.jarden.co.nz 18
PRODUCT DISCLOSURE STATEMENT
Please consult the Jarden General Terms and Conditions for further information.
Volatility Risk
Typically, Jarden will close out FX Contracts if the margin in your account is exceeded by losses, however, from
time to time, major events in the currency market may cause a dislocation that is described as volatility risk.
This volatility risk is used to describe a significant event in the financial market which leads to rapid instability
and often has a negative impact on investors.
In this event, an investor with an open FX position may suffer losses that are greater than the total funds that
they initially invested, this leads their account to become negative or in “overloss”. There is no limit to how
much an investor can enter into overloss, and in this event, the investor is in default with Jarden.
Issuer Risks
When you enter any derivatives position with Jarden you are exposed to the risk that Jarden becomes
insolvent and unable to meet its financial obligations. Your FX Contract may cease to exist or be mandatorily
closed by the liquidator in the event of insolvency.
Jarden’s creditworthiness has not been assessed by an approved rating agency. This means that Jarden has
not received an independent opinion of its capability and willingness to repay its debts from an approved
source. Jarden’s audited accounts are available to all clients free of charge.
To avoid market risk, Jarden will only act as a broker for clients trading derivatives. What this means is that, apart
from a client facilitation account, Jarden hedges all our derivative trading positions with reputable hedging
counterparties and will not take uncovered principal positions (unlike a broker who acts as a market maker).
Risks When Entering or Settling the Derivatives
There are a number of additional risks that you must be aware of when you enter into or settle FX Contracts.
Delivery risk – Selling Options
At expiry the FX Option’s seller is liable to deliver and take delivery of the underlying currencies at the strike
price. There is a risk that at delivery, the currencies may be unavailable to trade.
Systems Risks
Operational risks in relation to Jarden’s trading platforms are inherent in every FX Contract. For example,
disruptions in Jarden’s operational processes such as communications, computers, computer networks,
software or external events may lead to delays in execution and settlement of transactions.
Clients receiving a disruption to the trading platforms must call the trading desk in order to open/ close
positions. In the event that a disruption occurs on the Jarden side, you may be unable to trade in an FX product
offered by Jarden and you may suffer a financial loss or opportunity to close a position.
Jarden does not accept or bear any liability in relation to the operation of the Jarden trading platforms and
acceptance of derivative orders are made on a best endeavours basis.
Your acceptance of the quote constitutes an offer to Jarden and the FX Contract is binding at the point in which
Jarden accept your offer by placing it into our trading platforms.
Jarden Securities Limited | www.jarden.co.nz 19PRODUCT DISCLOSURE STATEMENT
4. Fees
Applicable Fees and Charges for These Products
Jarden will charge clients commissions on FX Contracts depending on the volume of transactions and
service requirements of the client.
Fees are typically agreed between clients and their Jarden dealer during the account opening process but
can be re-negotiated at any time in the relationship.
Standard Fees and Charges
Commission:
Commission rates are charged at a default rate of up to 0.10% of the nominal face value of the FX Contract.
Additional Charges
FX Contracts may be subject to the following additional charges:
Interest Rates
Clients shall receive interest on accounts that are in excess. Typically, the interest rate for accounts in excess
will be a maximum of 2.0% below Jarden's base rate, which is based the Official Cash Rates (“OCR”) of each
country and are subject to change at any time.
At month end, the interest calculated on each currency is converted to the account’s base currency (NZD
unless otherwise instructed).
Withholding tax is calculated and deducted from any interest earned.
Default Interest Rates
Clients shall pay default interest rates of a maximum of 2.0% above Jarden's base rates for accounts in deficit
which is calculated based on the margin deficit of each currency in negative. As with interest rates, default
interest is based on the OCR of each country and is subject to change at any time.
If a client’s account is in debit in one currency and credit in another, it is the client’s responsibility to manage
the currency balances. At the client’s request Jarden are able to convert currency amounts within the
account using interbank exchange rates.
The interest rates that differ from the above will be agreed on with the advisor when the account is opened.
Termination or Alteration Fees
There are no specific fees charged for closing a FX Contract, however, as the client effectively has to take the
opposite position to close the contract, Jarden will provide the client with a quote for the opposing contract.
Should the client agree to this quote, then they will receive any profits on the FX Contract or be obligated to
pay any losses.
Holding Charges
Additional holding charges may apply if an FX Contract is not delivered on the value date, which reflects the
funding of not settling the two currencies. Clients will receive interest for the bought currency and pay default
interest for the sold currency.
For example, if the client has bought USD they might receive 0.25% and if they have sold NZD, they might
have to pay 2.5%. This means they will be subject to a holding charge of 2.25% on the Forward.
The holding charge will either be a debit or credit to the client’s account depending on the currency pair not
settled. The charge will apply every day until the open position is closed out.
Jarden Securities Limited | www.jarden.co.nz 20PRODUCT DISCLOSURE STATEMENT
Clients should also be aware that the rate that we provide you may differ from time to time with the rate which
we obtain from our counterparty. This is because as a broker, Jarden hedges all our client positions to mitigate
risks to both our clients and the firm. This is commonly known as a ‘spread’. The spread is not a fee or
commission payable by the client and the quotation price of an FX Contract is not reflective of a spread,
however, clients should understand that Jarden may receive revenue from this.
General Account Fees
In addition to fees associated with FX Contracts, Jarden may charge the following fees that are associated
with the operation of your Jarden account.
Payment Fees
Jarden will charge payment fees on withdrawals from your Jarden account if:
• The payment is a foreign currency transfer
• The payment is to an overseas beneficiary
• The payment is in NZD to a New Zealand bank account, but is a ‘same day’ transaction
• These fees are typically a dollar figure amount and are charged at the time of the payment.
Full details of these fees are available on Jarden’s website www.jarden.co.nz
Cash Handling Fees
As Jarden is not a bank, we have a strict ‘no cash” policy for funds being deposited into Jarden’s client
accounts. If physical cash is deposited, the client will be contacted and a 15% cash handling fee will apply to
that cash deposit.
For example, if NZD $10,000 cash is deposited into Jarden’s client account, then NZD $1,500 will be
deducted as a cash handling fee.
5. How Jarden Treats Funds and Property Received from You
How to Transfer Funds to Jarden
In order to trade FX Contracts with Jarden, clients must deposit funds with Jarden in one of our client trust
accounts. Jarden holds a number of client trust accounts in different currencies and these bank details are
available 24 hours a day on our website. You are able to choose the currency in which you wish to transfer
funds to Jarden and the funds can be retained in that currency or you are able to instruct Jarden to convert to
another currency on your behalf.
The currencies you hold in your Jarden account do not have to relate to the same currency pair as the FX
Option that you wish to trade, however, by doing so you are subjecting yourself to greater currency risk.
Remember a negative currency balance is subject to default interest rates as explained in Section 4 of this
PDS.
Jarden requires that funds transferred electronically from clients must originate from a bank account in the
same name as the client’s Jarden account. Any deposits from third parties or of unidentified origin may be
subject to additional compliance review or delays in allocating funds to your Jarden account. Jarden reserves
the right to return any third-party funds to the remitting bank.
Jarden Securities Limited | www.jarden.co.nz 21You can also read
