What is a Noon Average Rate Contract (NARC)

A noon average rate contract (NARC) is a type of currency forward contract that refers to the Bank of Canada's foreign exchange average noon rates as a benchmark. The contract's negotiated exchange rate is compared to the noon rate and the two parties settle the difference in cash. NARCs usually refer to the USD/CAD exchange rate.

Breaking Down Noon Average Rate Contract (NARC)

Noon average rate contracts utilize the noon rate posted by the Bank of Canada. The noon rate is the spot exchange rate posted by the Canadian central bank every business day at noon. This contract is designed to help mitigate foreign exchange risk. Because NARCs are marked-to-market daily, the parties involved will hedge their currency exposure throughout the life of the contract.

While the Bank of Canada publishes noon rates for other currency pairs as well, the USD/CAD is the one that is most heavily used. Contracts involving currencies other than the Canadian dollar will use another daily benchmark if required.

Noon Average Rate Contract Example

Assume Canadian Company A needs to sell $1 million US dollars in one year. This could be because they are selling products in the US and will be paid a lump sum of US dollars for those products in the future.

The USD/CAD forward rate at the time is 1.0655. They lock in this rate with another party via a noon average rate forward contract, likely because they think the US dollar may fall over the next year (or CAD will rise). Alternatively, they simply want to lock in a rate so they know what they will get in CAD for the US dollars they need to sell in the future. 

Once the rate is locked in, the contract will be marked to market based on the daily fluctuations of the USD/CAD currency pair. The noon rate published by the Bank of Canada will be used as the benchmark.

If in one year the USD/CAD noon rate is 1.03, Company A will be happy because it sold the US dollars at 1.0655. They benefited by CAD$35,500 ((1.0655 - 1.03 x $1 million). If, on the other hand, the noon rate in one year is 1.08 they missed out on the advantageous currency move. They are CAD$14,500 (1.0655 - 1.08 x $1 million) worse off than if they didn't enter the contract and instead waited the year and sold the US dollars at 1.08.

Since forward contracts trade over the counter the parties involved can choose the terms of the contract.