When dealing with some of the less sophisticated treasury operations I occasionally come across some fairly, well, unconscionable behaviour by the banks. This is normally where the bank has given the client some heavily off-market rates for whatever business they are doing.
A good example might be forward foreign exchange deals. A normal forward is priced based on the spot rate current at the time of the deal, plus (or minus) the forward points, which are calculated based on the differential interest rates between the two currencies involved. The scope for going wildly off-market on these rates is limited – the forward points are published and easy to calculate, so any excess margin has to be easy to justify to the (bank’s) client.
The scope for “playing around” comes in when anything other than a normal (vanilla) forward is being done. For example, a par forward (also called a flat forward) is not easy to calculate the correct price for and often the customer does not bother to check the rate that the bank gives, just accepting it and trusting the bank is not doing something wrong.
How, then, can you be sure you are getting a fair price? The simple way to go about it, as with many things, is to phone around. When you contact your bank, which you should do first, tell them that you will be calling around to get other quotes. This alone should do a good job of ensuring they give you a fair price from them. Putting in a phone call, followed up by a confirming email, to 5 or 6 other banks should only be the work of about 10 minutes per bank. Ask for a two-way price (if they will not quote it, go no further) and do not say if you are going to be buying or selling the forex. Ask them to email you the rates so you have a copy of them and there is no doubt as to the rates they quote.
Keep in mind the bank will be seeking to make a reasonable profit on the deal – you will probably not get an exact on the market rate and also that dealing with another bank will impose some additional time penalty on you. Have a look at the differing rates and make the decision. The rates they quote will normally only be good for a few hours, but this gives you more than enough time to get this all done.
A few hours spent here can, and probably will, save you a fair amount on your hedging program for the year. Even if it does not you can confidently report to your CEO or Board that the rates you are getting are fair.