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CURRENCY EXCHANGE

Fixed for Floating Currency Exchanges

Description:

A fixed for floating forward currency exchange is similar to a regular forward currency exchange, however it does not involve a direct exchange of currencies (hence, non-deliverable). In a fixed for floating forward currency exchange two parties agree to exchange money based on the difference between a negotiated fixed rate and the Bank of Canada Noon Day (BCND) rate. Effectively, the customer pays (receives) a negotiated fixed rate applied to an agreed upon principal amount, and in exchange receives (pays) the BCND rate. ATB credit approval is required for a fixed for floating forward currency exchange.

Example

A Company generates revenue every month in U.S. dollars (USD). The company expects to collect $5 million USD of revenue one month from today. The company’s operating costs are in Canadian dollars (CAD) and they do not want to be exposed to changes in the CAD/USD exchange rate. As a result, they enter into a fixed for floating forward currency exchange with ATB for $5 million USD for one month from today at a fixed exchange rate of 1.1735 CAD/USD. If the BCND CAD/USD rate is less than 1.1735, ATB will pay the company 1.1735 minus the BCND CAD/USD rate multiplied by $5 million USD. If the BCND CAD/USD rate is greater than 1.1735, the company will pay ATB the BCND CAD/USD rate minus 1.1735 multiplied by $5 million USD.

The same company also expects to pay $2 million USD in expenses two months from today. The company enters into another fixed for floating forward currency exchange with ATB for $2 million USD for two months from today at a fixed exchange rate of 1.1730 CAD/USD. This time, if the BCND CAD/USD rate is less than 1.1730, the company will pay ATB 1.1730 minus the BCND CAD/USD rate multiplied by $2 million USD. If the BCND CAD/USD rate is greater than 1.1730, ATB will pay the company the BCND CAD/USD rate minus 1.1730 multiplied by $2 million USD.

Risk Management Strategy

A fixed for floating forward currency exchange is an effective risk management strategy when you want to bring a higher level of certainty to revenue and cash flow by protecting yourself from future unfavourable changes in the foreign currency exchange rate. In exchange for this protection, you forfeit the potential upside of favourable movements in the foreign exchange currency rates.

Commonly used terms (PDF - 472K)

To speak to our local traders directly, please contact:
	Rob Laird, Director	Rob Van Horne, Managing Director
	403-974-3582	403-974-3582
	403-815-1911	403-519-3950
	Deborah Polny, Assistant General Counsel	Rimas Siulys, Managing Director Market Risk
	780-408-7320	780-408-1960
	Derivative Settlements
	780-408-6456