Forex Investment and Currency Trading

A buyer of a CAD Call buys the right, without the obligation, to exchange a fixed currency amount for another at a set strike price on a specific future date. Unlike a spot or forward transaction, the buyer of the CAD Call is not obligated to buy CAD. If USD/CAD spot at expiration is below the strike, the holder of the CAD Call will exercise the call and buy CAD / sell USD at the strike. However, if spot is above the strike expiry, the holder will not exercise the CAD call and can buy CAD / sell USD at the more advantageous prevailing spot rate. The buyer of the option generally pays an upfront premium, however the contract can be structured for payment of premium at maturity.

Benefit

• Provides a hedge against a CAD appreciation
• Provides 100% participation (less the premium) in a CAD depreciation
• If triggered, the contract can be structured to net settle, no notional amounts need to be exchanged at maturity

Drawback

• An option premium must be paid
• Exchange rate of conversion cannot be determined until maturity, although the worst case rate is known

Implied View

• The view is CAD will depreciate, but protection is required in the event the view is wrong
• The buyer’s confidence level of CAD appreciation will determine the strike and premium of the CAD Call