A Participating Forward protects your company against unfavourable changes in foreign currency spot rates, while letting you participate to a certain extent in favourable changes. By limiting your ability to participate 100% in favourable exchange rate movements, you can obtain 100% protection against unfavourable movements at no cost. Essentially, you lock in an exchange rate now while leaving a portion of your investment open to participation in favourable exchange rate movements. To arrange a Participating Forward, you purchase a Canadian Dollar Call option and sell a Canadian Dollar Put option of different amounts, but at the same strike price. You do not pay an up-front cost.

For Exporters:

If your company exports goods, your underlying Put amount will be less than your underlying Call amount. This protects all of your investment against unfavourable spot rate moves by establishing the lowest selling price for your full hedge amount. At the same time, it allows some exposure in case of favourable moves. The amount of downward exposure you are willing to bear will determine the amount of upward participation possible. The upward potential for the participating portion of your contract is limited only by movement in the spot price.

As an example, suppose your export company has a full hedge amount of $1,000,000 U.S. You want to protect the full amount against a strengthening Canadian dollar and participate 33% in any Canadian dollar weakness. As an example, assume:

• You buy an "out of the money" Canadian Dollar Call for your full hedge amount of $1,000,000 U.S. at a 1.3395 strike price. This gives you the right to buy Canadian dollars (sell $1,000,000 U.S.) at the rate of 1.3395 in three months' time.

• You sell an "in the money" Canadian Dollar Put for $670,000 U.S. at the same 1.3395 strike price. This obliges you to buy Canadian dollars (sell $670,000 U.S.) at 1.3395 if the option is exercised.

These combined contracts create a Participating Forward that guarantees 1.3395 as the lowest selling price for your full hedge amount of $1,000,000 U.S., and lets you participate on $330,000 U.S. if the spot rate moves favourably above 1.3395.

• If, at expiry, the Canadian dollar has strengthened to a spot rate below 1.3395, you exercise your Call option and buy Canadian dollars (sell $1,000,000 U.S.) at 1.3395. The Put option will simply expire.

• If the Canadian dollar has weakened to a spot rate above 1.3395, TD Bank will exercise the Put option for $670,000 U.S. You can then sell the balance of $330,000 U.S. at the current spot price. The Call option will simply expire.

For Importers:

If your company imports goods, your underlying Call amount should be less than your underlying Put amount. This protects your investment against unfavourable spot rate moves by establishing the highest purchase price for your full hedge amount. At the same time, it allows some exposure in case of favourable moves. The amount of upward exposure you are willing to bear will determine the amount of downward participation possible. The downward potential for the participating portion of your contract is limited only by movement in the spot price.

As an example, suppose your export company has a full hedge amount of $1,000,000 U.S. You want to protect the full amount against a weaker Canadian dollar and participate 33% in any Canadian dollar strength.

• You buy an "out of the money" Canadian Dollar Put for your full hedge amount of $1,000,000 U.S. at a 1.3573 strike price. This gives you the right to sell Canadian dollars (buy $1,000,000 U.S.) at the rate of 1.3573 in three months' time.

• You sell an "in the money" Canadian Dollar Call for $670,000 U.S. at the same 1.3573 strike price. This obliges you to sell Canadian dollars (buy $670,000 U.S.) at 1.3573 if the option is exercised.

These combined contracts create a Participating Forward that guarantees 1.3573 as the highest purchase price for your full hedge amount of $1,000,000 U.S., and lets you participate on $330,000 U.S. if the spot rate moves favourably below 1.3573.

• If, at expiry, the Canadian dollar has weakened to a spot rate above 1.3573, you exercise your Put option and sell Canadian dollars (buy $1,000,000 U.S.) at 1.3573. This is your maximum upside potential. The Call option will simply expire.

• If the Canadian dollar has strengthened to a spot rate below 1.3573, TD Bank will exercise the Call option for $670,000 U.S. You can then buy the balance of $330,000 U.S. at the current spot price. The Put option will simply expire.

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.