Common Hedging Strategies
These common hedging solutions offer a worst case hedge rate, and may offer features such as participation in favourable markets.
FX Forward
An FX Forward locks in a fixed rate to buy or sell a specific amount of one currency (i.e. USD) against another (i.e. CAD) at a specific future date or range of dates. The difference between the Spot Reference and the Forward Rate is defined as the Forward Points. Forward Points are primarily driven by the interest rate differential between the two currencies, but also supply and demand dynamics in the market.
Vanilla Put or Call Option
The option buyer has the right, but not the obligation, to exchange a specific amount of one currency for another at a pre-determined exchange rate (called the strike rate) at a specific future date. The option buyer has no obligation to transact, and an upfront premium payment is required.
Participating Forward
The Participating Forward offers full protection at a predefined level, and full participation in favourable markets for a predefined percentage of the total notional being hedged. This is possible because the protection rate will be worse than the market forward rate. The higher the percentage of participation notional, the worse the protection rate will be compared to the market forward. There is typically no upfront cost.
Tunnel
A Tunnel is a solution that provides protection to buy or sell a currency for another at a predetermined rate. It also allows participation in favourable market moves to the Benefit Rate, beyond which there is an obligation to transact at the Benefit Rate. It is simplest to think of this as a worst case protection rate with a cap on the possible participation. There is typically no upfront cost.
Forward Extra
Similar to the Tunnel, a Forward Extra offers full protection at a predetermined rate and some participation in favourable markets. The difference is that the Forward Extra includes a reset feature, whereas the Tunnel does not. The trigger can be defined as being active only at expiry (European trigger), during the life of the trade (American trigger), or during a pre-defined period (Window trigger).
Common Outperformance Strategies
These common hedging solutions may outperform the market forward by including features such as leverage or rate resets. These features can be applied to some of the Common Hedging Solutions above to enhance their levels. It is important that the leveraged notional does not exceed your total exposure.
Ratio Forward
A Ratio Forward provides an enhanced exchange rate versus the market forward in exchange for the possibility of selling or buying additional notional at the enhanced rate.
Ratio Tunnel or Ratio Forward Extra
By including a predetermined amount of leverage to these solutions such that the obligation leg has more notional than the protection leg, the protection and/or participation levels can be improved.
Range Dependent Forward
The Range Dependent Forward provides a conversion rate that outperforms the market forward, but will reset to a worse rate should either predefined upper and lower barrier triggers be reached during the life of the trade.
Yield Enhancement Strategies
In order to obtain enhanced yields it is necessary to take some risk on either the principal or the interest payments of the instrument. It is important to note that these are not hedging instruments, and they cannot be cancelled early unless breakage costs are paid.
Wedding Cake Instrument
The Wedding Cake Instrument is a Foreign Exchange Linked Principal-Protected Strategy that offers the possibility for a higher yield for funds that are deposited with Royal Bank. The invested funds can be in USD or CAD and will be returned at expiry in the same currency. Yield – if earned – is returned in the same currency as the invested funds. Learn more
Dual Currency Instrument (DCI)
A Dual Currency Instrument gives an enhanced yield compared to term deposits in exchange for giving RBC Capital Markets the right to return the Principal in either of the two respective currencies calculated at a pre-agreed exchange rate. The yield will be returned in the original currency. It is important to note that this is not a hedging instrument. Learn more
Principal Protected FX-linked Investments
We can offer various bespoke yield enhancement ideas that fit your views on a particular currency pair, all on a principal protected basis. If your view is realised, you can earn a yield exceeding that available through term deposits.