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OUR SERVICES
DERIVATIVES
CURRENCY EXCHANGE
Spot and Forward Currency Exchanges
 Description:
In both a spot forward currency exchange two parties agree to exchange currencies of equivalent value. The customer pays a specified currency to ATB, and in exchange, they receive another specified currency from ATB. A spot currency exchange settles by a direct exchange of currencies at the agreed upon spot rate. A forward currency exchange also involves a direct exchange of currencies; however, settlement occurs on an agreed upon future date at the agreed upon forward rate at the time of he transaction. A forward currency exchange may also involve a series of future settlement dates with the corresponding forward rates based on the forward curve at the time of the transaction.
Example
A company generates revenue every month in U.S. dollars (USD). The company has just received $2 million USD of revenue, and expects to collect $5 million USD of revenue on 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 spot currency exchange with ATB for $2 million USD at the current spot exchange rate of 1.1750 CAD/USD. The company pays the $2 million USD to ATB today, and in return, receives $ 2.35 million CAD ($2 million USD x 1.1750 CAD/USD). Next, the company enters into a forward currency exchange with ATB for $5 million USD for one month from today at the corresponding forward exchange rate of 1.1735 CAD/USD. The company will pay the $5 million USD to ATB, and in return, receive $5.8675 million CAD ($5 million USD x 1.1735 CAD/USD).The same company also expects to pay $3 million USD in expenses two months from today. The company enters in another forward currency exchange with ATB for $3 million USD for two months from today at the corresponding forward exchange rate of 1.1730 CAD/USD. This time, the company will receive the $3 million USD from ATB, and in return, pay $3.519 million CAD ($3 million USD x 1.1730 CAD/USD).
Risk Management Strategy
A spot or forward currency exchange is an effective risk management strategy when you want to bring certainty to revenue and cash flow by protecting yourself from future unfavorable 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)
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