Foreign Currency Services
Zero-Cost Range Forwards
What is a Zero-Cost Range Forward?
A Zero-Cost Range Forward can protect you by giving you a range of exchange rates within which you may sell/buy a currency at expiry of the forward contract.
What are the benefits/risks?
You are paying no option premium and it provides you with full protection against unfavourable foreign exchange movements beyond a predetermined level. The predetermined level of protection must be set at a level less favourable than the current forward price. Participating in favourable currency movements is limited.
An example
You purchased inventory from a company in the United States and $100,000 US is due in three months. You enter into a Zero-Cost Range Forward so that the cost of the Canadian Dollar Put is offset by the revenue from the sale of the Canadian Dollar Call. The Call and the Put are both for the same notional amount and the “range” in which you are protected is determined by the aim to match the premium paid with the premium received.
| Protecting: |
1.2320 for 3 months |
| Current Spot Rate: |
1.2000 |
| Purchase C$ Put - Strike price: |
1.2320 ___> |
Premium Owed: |
0.0100 C$/US$ |
| Sell C$ Call - Strike price: |
1.1650 ___> |
Premium Earned: |
0.0100 C$/US$ |
|
Total Cost: |
0.0000 C$/US$ |
Click Here to launch the
Foreign Exchange Calculator
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For more information, contact a Relationship Manager at the Commercial Banking Centre nearest you.
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