A Forward Contract lets your company buy or sell one currency against another, for settlement on the day the contract expires. Unlike spot contracts, a forward contract eliminates the risk of fluctuating exchange rates by locking in a price today for a transaction that will take place in the future. This is called hedging (or insuring) your expected foreign currency transactions. By protecting your future cash flow against negative currency fluctuations, it can eliminate some of the uncertainty of doing business abroad.

With a Forward Contract, the locked-in forward price does not reflect market predictions of future spot exchange rates. Rather, it reflects the difference in interest rates between countries. In the forward market, the currency of a country with lower interest rates than Canada will trade at a "premium". The currency of a country with higher rates than Canada will trade at a "discount".

Here is an example:

Assume these tables represents the "spot" and "two month forward" prices of U.S. dollars and Euro in terms of Canadian dollars.

In this example, U.S. interest rates are higher than in Canada, and U.S. dollars are selling at a discount in the forward market. A Canadian company that wants to sell U.S. funds in 60 days can "sell U.S. dollars forward" today at the locked-in price of 1.2488 (1.2500 - .0012).

Because the EURO interest rates are lower than in Canada, Euro dollars are selling at a premium. A Canadian company that wants to buy Euro funds in 60 days can "buy Euro forward" today at a locked-in price of 1.5965 (1.5950 + .0015).

For more on how TD can work with you to manage your cash, foreign exchange and interest rate risk, review About TD Financial Management Services. Or, if you have a specific question, e-mail us and a TD Treasury representative will follow-up directly with you.