Currency Certificate

DEFINITION of 'Currency Certificate'

A note that grants the holder the right to convert a specific amount of one currency to another at a given exchange rate until it expires. A currency certificate is a bearer certificate in that there is no registered owner. Currency certificates are a useful tool for hedging foreign exchange risk.

BREAKING DOWN 'Currency Certificate'

For example, suppose that Company XYZ is based in America but also has operations in Canada. The company will be receiving Canadian dollars from sales, but will want them to be exchanged for U.S. dollars. If the U.S. dollar weakens relative to the Canadian dollar, the company will lose money.

Each month, Company XYZ forecasts the next month's Canadian sales. The company could purchase one-month currency certificates for the amount of next month's estimated Canadian sales at a foreign exchange rate specified today. This will protect the company if the Canadian dollar appreciates relative to the U.S. dollar, because it can turn in these certificates and convert the currency at the note's specified rate. If the U.S. dollar appreciates relative to the Canadian dollar, the certificates will not be used.

RELATED TERMS
  1. Trust Certificate

    A bond or debt investment, usually in a public corporation, that ...
  2. Periodic Payment Plan Certificate

    A certificate representing ownership interest in a periodic payment ...
  3. One-Day Certificate

    A type of temporary financing used by the U.S. Treasury. One-day ...
  4. Mutual Investment Certificate

    A certificate issued by a local or municipal authority for the ...
  5. SEC Form N-27E-1

    A filing with the Securities and Exchange Commission (SEC) that ...
  6. Indexed Certificate Of Deposit ...

    A savings certificate entitling the bearer to receive an interest ...
Related Articles
  1. Personal Finance

    7 Facts You Didn't Know About The Greenback

    There's more to that $10 bill in your pocket than you think - read on for some interesting facts about U.S. currency.
  2. Forex Fundamentals

    Here's How You Calculate An Exchange Rate

    Struggling to get a grasp on exchange rates? Here's what you need to know.
  3. Forex

    How Currency Forward Contracts Work

    A currency forward contract locks the exchange rate for a currency’s purchase or sale at a future date.
  4. Options & Futures

    Using Interest Rate Parity To Trade Forex

    Learn the basics of forward exchange rates and hedging strategies to understand interest rate parity.
  5. Forex Fundamentals

    What Do Weak Dollar And Strong Dollar Mean?

    A weak dollar and a strong dollar describe the strength of the U.S. dollar in comparison to other currencies in the foreign exchange market.
  6. Mutual Funds & ETFs

    Hedge Against Exchange Rate Risk With Currency ETFs

    Currency moves are unpredictable and can have an adverse effect on portfolio returns. Find out how to protect yourself.
  7. Forex Fundamentals

    The Effects Of Currency Fluctuations On The Economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by ...
  8. Economics

    Canadian Dollar Continues To Drop, But Why?

    The Canadian dollar-US dollar exchange rate is positively related to oil prices partly due to crude oil's big share of Canada's total FX currency earnings.
  9. Forex Education

    How Do You Make Money Trading Money?

    Making money in the foreign exchange market is a speculative process. You are betting that the value of one currency will increase relative to another.
  10. Forex Education

    Forex Tutorial: Reading a Forex Quote and Understanding the Jargon

    One of the biggest sources of confusion for those new to the currency market is the standard for quoting currencies. In this section, we'll go over currency quotations and how they work in ...
RELATED FAQS
  1. How do you get a hard copy of a stock certificate?

    Before online brokers and personally-directed accounts, holding a physical stock certificate was a necessity, as this was ... Read Answer >>
  2. I hold stock certificates in a company that just had a stock split. What happens ...

    The short answer is that a stock split will have little effect on the holder of stock certificates. In most cases when an ... Read Answer >>
  3. How can I get 100k in a Canadian bank to a U.S. Investment firm with minimal loss ...

  4. Is this stock certificate worthless?

    I bought 50,000 shares of restricted common stock from a company in December 2015 and received a stock certificate. I then ... Read Answer >>
  5. I lost my share certificate. Do I still own the stock?

    Regardless of whether a shareholder loses his or her stock certificate, that person still owns the shares. However, in order ... Read Answer >>
  6. Should I convert my telecom paper stocks to electronic records?

    Convert your paper shares of a telecommunications company's stock to electronic form in just a few simple steps, and make ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center