Currency Certificate

AAA

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.

INVESTOPEDIA EXPLAINS '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. Appreciation

    An increase in the value of an asset over time. The increase ...
  2. Currency Option

    A contract that grants the holder the right, but not the obligation, ...
  3. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  4. Forex - FX

    The market in which currencies are traded. The forex market is ...
  5. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  6. Foreign-Exchange Risk

    1. The risk of an investment's value changing due to changes ...
Related Articles
  1. Getting Started In Foreign Exchange ...
    Forex Education

    Getting Started In Foreign Exchange ...

  2. Forex: Wading Into The Currency Market
    Forex Education

    Forex: Wading Into The Currency Market

  3. Top 7 Questions About Currency Trading ...
    Forex Education

    Top 7 Questions About Currency Trading ...

  4. How To Place Orders With A Forex Broker
    Forex Education

    How To Place Orders With A Forex Broker

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center