Forward Foreign Exchange Contracts

EXAMPLE: - Sale of aircraft equipment to Canada Your company agrees to sell aircraft parts to Canada for $500,000 CD (Canadian Dollars). The buyer issues a 90-day letter of credit in your favor. Terms of the letter of credit only call for payment after the goods are shipped; therefore, you will not receive payment for 90 days. To secure the US Dollar equivalent, you sell the Canadian Dollars to California Bank & Trust with a settlement date of 90 days in the future. Should the Canadian Dollar have a lower rate of interest than the US Dollar over the same time period, a better rate of exchange is shown for the conversion of your Canadian dollar. You would benefit, in effect, from holding a lower yielding instrument (the Canadian Dollars) for that 90-day period. At maturity, you would transfer the Canadian Dollars to California Bank & Trust's Canadian account and your account would be credited with US Dollars.

Foreign Exchange
Products and Services
• Foreign Exchange Services
• Spot Contracts
• Forward Contracts
• Window Forward Contracts
• International Check Clearing
• Foreign Draft Issuance
• International Wire Transfers
• Currency Notes

Back to Forward Window Contracts

Risk Profile of This Exposure

What can happen if
left unhedged?
Leave Position Unhedged
Amount:
Canadian Dollars 500,000

Spot rate: 1.5000


90 day forward adjustment:
-.0015
Using a Forward Contract
Booked - $333,333.33
(C$ 500,000 / 1.5000)

Spot moves to 1.6000


Actual Receipts - $312,500.00

FX Gain / Loss - ($20,833.33)
Contract Rate:
1.5000 - .0015 = 1.4985

Booked - $333,667.00
(C$ 500,000 / 1.4985)

Actual Receipt - $333,667.00

FX Gain / Loss - $0.00