Currency hedging


Any company that carries out international transactions is exposed to risks related to exchange rate variations. That's why it's important to protect your profit margin with hedging instruments adapted to your needs.

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Main foreign exchange risk solutions

When you issue or receive payment in a foreign currency, the conversion rate may differ from the rate you anticipated when you signed the contract with your client or supplier. Use the right tools to protect your profits.

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Forward contract

  • This type of transaction allows you to manage your foreign exchange risk by fixing your conversion rate in advance. This eliminates the uncertainty associated with currency fluctuations.

  • The forward exchange rate reflects the prevailing spot rate, adjusted upwards or downwards by the prevailing forward rates.

  • The maximum term allowed depends on your needs and the credit arrangements made with National Bank.

  • This contract can be settled on a fixed date, or open over a 30-day period (up to 180 days in some cases).

  • You can carry out the transaction online by signing in to Internet Banking Solutions for Businesses.

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Average-rate forward contracts

This transaction provides the same benefits as the forward and the range forward, but over a longer period; very useful to protect recurring transactions. 

  • Perform your currency conversions at the spot rate throughout the period of the contract.
     
  • We calculate the Bank of Canada's average noon rate for the same period.

  • We then make a cash settlement based on the difference between this average and the rate negotiated on your contract for the amount covered.  

  • This settlement offsets the spot rate obtained during the period.
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Range forward

  • Negotiate a range in which the exchange rate will be allowed to fluctuate, rather than a single rate.  Allows you to benefit from a favourable market variation up to a pre-determined level; if the market rate moves in the wrong direction, the collar will offer you a safety net. 

  • Maximum and minimum rates are based on the market rates for the selected dates, as well as the exchange rates you have used in your budget.

  • Maximum term of the collar depends on your business needs and the credit limit authorized.

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Other FX solutions

  • Currency swap for businesses with payables and receivables in a single currency, but with different inflow and outflow dates.

  • Cap/floor sales enable you to wait for the market to reach a certain level before implementing a hedging strategy.

  • Participating forwards provide full protection against adverse market movements, while allowing partial participation in favourable market movements.

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Currency option

  • A currency option allows you to secure an exchange rate and protect yourself from unfavourable fluctuation while benefiting from favourable ones. This product is very useful when you respond to a call for tenders involving currency risk.

  • The premium you pay for this product depends on a number of factors, including the term, amount, domestic interest rate, current exchange rate and volatility of the exchange rate.

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Foreign exchange transactions

Take advantage of our new features to manage your foreign exchange contracts. On the platform, you can now :

  • Manage foreign exchange transactions

  • Postpone a contract

  • Advance a contract

  • Merge contracts

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To learn more, read our FAQ section.

What is currency risk?

A company is exposed to currency risk when the value of its transactions and investments, and even its viability, is affected by fluctuations in exchange rates. That's why it's so important to be familiar with the right protection options.

The following are fictional examples related to currency risk and currency protection:

1. International sales contract

You sign a contract stipulating that you will be paid in foreign currency. At the current exchange rate, your sales revenue will be $200,000. When you factor in $150,000 for manufacturing costs, your profit margin will total $50,000, or 25%. 


2. Currency decline (unfavourable)

You're worried your profit margin will disappear.


3. Currency increase (favourable)

The situation is reversed: the value of your sales converted into CAD increases.


4. Delivery

You deliver your product to a foreign company. Although the currency has declined slightly, your profit margin remains satisfactory.


5. Receipt of payment

The currency has plummeted since you delivered the product. After currency conversion, your sales revenue is just $180,000, bringing your final profit down to $20,000, or 10%. The value of the currency could also have increased and profited your company. A hedging strategy can prevent this uncertainty.


Types of FX hedging

Forward contract:

The original exchange rate is 100% locked in. 
 

Zero-cost range forward:

The final exchange rate is locked in but within a range rather than a single rate. 
 

Currency option:

Provides 100% protection against a rate drop, but lets you benefit from a rate increase (a premium is charged)2.

1. Buying materials abroad

You have signed a major contract that requires you to buy production materials in foreign currency. Your sales revenue will be 200,000 CAD, and your sourcing costs at the current exchange rate will be 150,000 CAD, resulting in profits totalling 50,000 CAD or 25%.

 

2. Currency decrease (favourable)

The materials will cost you less in Canadian dollars if you buy them now.


3. Currency increase (unfavourable)

The value of the materials in Canadian dollars has increased. You worry that this increase will reduce your total profits.

 

4. Approaching payment due date

Production is going well, but the value of the currency continues to rise, and the payment due date is approaching.

 

5. Payment due

Your materials will cost 20% more than expected. After currency conversion, your sourcing costs are $180,000, leaving you with total profits of just $20,000, or 10%. The value of the currency could also have decreased and profited your company. A hedging strategy can prevent this uncertainty.

 

Types of FX hedging

Forward contract:

The original exchange rate is 100% locked in. 
 

Zero-cost range forward:

The final exchange rate is locked in but within a range rather than a single rate. 
 

Currency option:

Provides 100% protection against a rate increase, but lets you benefit from a rate decrease (a premium is charged)2.

To learn more, download our guide, created in partnership with HEC Montréal.

Regulatory information

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Foreign exchange disclosures

National Bank of Canada acts as a market participant, as defined in the FX Global Code (Code), and is committed to conducting its FX Market activities in a manner consistent with the principles of the code. We are publishing the following disclosure statement to inform our clients and counterparties of how we conduct activities on the FX Market.

FX Disclosure Statement (PDF) – as of February 12, 2018

 

 

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Disclosure statement on over-the-counter (OTC) derivative transactions

National Bank of Canada wishes to inform you of the regulation governing the trading and reporting of swaps and other OTC derivative instruments in Canada (the “Reporting Regulations”).

Since October 31, 2014, market participants must report their transactions to provincial regulation entities in Quebec, Ontario and Manitoba.  Regulation has been extended to all provinces and territories since July 29, 2016. Here is the procedure to obtain an LEI.

 

Frequently Asked Questions (PDF)

Level 2 data required by LEI issuers (PDF)

New form requested by LEI issuers (PDF)

All participants in the OTC derivatives markets in Canada must obtain an LEI (Legal Entity Identifier) in order to comply with the Reporting Requirements. You will therefore be required to obtain an LEI in order to maintain your trading activities with National Bank.

To obtain your LEI, you must follow three easy steps:

Please note that generally, the processing time of your LEI request may take five (5) to ten (10) business days through GMEI Utility and two (2) business days through Bloomberg LEI. National Bank of Canada will ask for your LEI and other factual information through the trade facility opening or renewal process. 

Check out our directory of resources for reference websites

You can contact GMEI by email at CustomerService@GMEIutility.org

You can contact Bloomberg LEI by email at lei-support@bloomberg.net

Since their system does not allow you to answer their replies, we recommend you write all your questions in your initial email.

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FAQ

  • Manage foreign exchange transactions 

  • Postpone a contract 

  • Advance a contract 

  • Merge contracts  

The new platform allows greater autonomy for the management of your foreign exchange contracts. We’ll also be adding new features in the coming months.

No. However, a monetary adjustment (debit or credit) will be made to account for the fair market value of the contract. The new deferred contract rate will reflect this adjustment. In the case of a debit, the new rate will be better than the original rate. In the case of a credit the new rate will be worse than the original rate. If you have any questions, contact your foreign exchange trader at 514-390-5655 or 1-844-990-5655. 

As soon as you’ve confirmed the transaction.

Little details that matter

  1. This image does not reflect actual values and is intended as an example.

  2. Prices for this service may vary. Please contact your Account Manager for more information.