Many companies, particularly smaller businesses, choose to book spot trades, by trading spot, you execute the trade at the prevailing market exchange rate. This approach does not allow the company to form a view on exchange rates, which negates the possibility to trading at a more favourable level.
Merchant West Capital markets assist various companies by making use of forwards, spots, orders and derivatives as hedging techniques in order to limit risk, while attempting to maximize upside potential. One such example is the stop loss, which involves setting an order to execute the trade at a predetermined level.
This strategy and any strategy for that matter comes with associated risks. Markets continuously fluctuate and the maximum risk a company may be willing to take dictates how far the stop loss can be placed from the prevailing spot rate.
This is exactly where the Merchant West Capital Markets risk sharing option adds value. We are willing to share in this risk with our clients, allowing more risk to be taken in the position while reducing the net financial risk to you.
Practically the process works as follows, we agree a current market price as a benchmark, execute a stop loss at the agreed level and quantify the amount of total financial risk in the trade. We share the financial risk (or reward), on a 50/50 basis, this ensures that we have skin in the game and are aligned with our clients. Normally, a predetermined time frame is set, after which any profit or loss is shared between Merchant West Capital Markets and the client.
The position is also actively managed by moving the stop-loss level down should the market move favourably, essentially shifting the focus from protecting losses to protecting profits.