The Spot Contract is the most basic and popular foreign exchange product. It is an agreement to buy or sell one currency in exchange for another. You settle the contract the same day, at a price based on the prevailing "spot exchange rate" -- the current value of one currency compared to another.

Although the spot market lets your company buy or sell currency as you need it, spot exchange rate movements are highly unpredictable, even during a single trading day. Relying on the spot market for future foreign exchange is highly speculative. It can expose your company's cash flow to the risk of unfavourable changes in foreign currency values.

How is a currency's spot rate expressed?

Foreign exchange markets use the American dollar (USD) as the standard unit of measurement for all currencies. The Canadian dollar (CAD) is expressed in terms of the number of U.S. dollars needed to buy it, or as the number of Canadian dollars needed to buy one U.S. dollar.

For example, if it takes .7463 U.S. dollars to buy one Canadian dollar, it takes 1.3400 Canadian dollars (1 ÷ .7463) to buy one U.S. dollar.

What affects a currency's spot rate?

The current market value (spot exchange rate) of a country's currency can be affected by any or all of the following:

• the country's current rate of inflation and expected future inflation rates
• the country's balance of payments
• the monetary and fiscal policies of the country's government
• various economic indicators which create expectations about the country's economic health
• differences between foreign and domestic interest rates
• central bank interventions

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.