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Noon Average Rate Contract (NARC)

Contents

  1. Deciphering Noon Average Rate Contracts
  2. Introduction to NARCs:
  3. Evolution of NARCs:
  4. Unraveling Noon Average Rate Contracts (NARCs)
  5. Utility of the Noon Rate:
  6. Risk Mitigation Strategies:
  7. Special Considerations and Example
  8. Transition Period:
  9. Practical Example:

Unlocking the Noon Average Rate Contract (NARC): Understanding Its Significance and Evolution

Deciphering Noon Average Rate Contracts

Introduction to NARCs:

A noon average rate contract (NARC) was a type of forex contract reliant on the noon exchange rate set by the Bank of Canada (BOC). This rate, released daily at 12:00 p.m., formed the basis of NARCs, primarily involving the U.S. and Canadian dollars.

Evolution of NARCs:

Originally established by the BOC to manage currency risks, NARCs ceased trading in 2017 when the noon rate was replaced with a continuously updated indicative rate. This shift marked the end of an era in forex trading, impacting businesses and traders alike.

Unraveling Noon Average Rate Contracts (NARCs)

Utility of the Noon Rate:

The noon rate served as a benchmark for forex calculations, aiding traders and companies dealing with currency fluctuations, particularly between the USD and CAD. The rate provided a reference point for daily transactions, offering stability in an otherwise volatile market.

Risk Mitigation Strategies:

NARCs played a crucial role in mitigating currency risk for businesses. Marked to market daily, these contracts allowed parties to hedge their currency exposure throughout the contract's duration. The comparison between negotiated rates and the noon rate facilitated cash settlements, ensuring financial stability.

Special Considerations and Example

Transition Period:

The BOC's decision to discontinue the noon rate in 2017 necessitated a transition period for traders and companies. While the noon rate remained valid until April 28, a single indicative rate was adopted from May 1, 2017, onwards, streamlining forex transactions.

Practical Example:

Illustrating the concept, consider a Canadian company selling $1 million USD in one year. By entering into a NARC at a predetermined rate, the company hedges against adverse currency movements. Marked to market based on daily fluctuations, the contract's outcome hinges on the USD/CAD exchange rate.