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Types and Modalities

Types of Exchange

The concept of "type" in the context of exchange refers to the price that the exchange operation will cost. Recapping the difference between buying rate and selling rate:

  • Selling: The price the institution charges to sell foreign currency to you.
  • Buying: The price the institution pays to buy your foreign currency.

Remember, the definition of buying/selling is always from the financial institution's point of view, not the client's.

Reference Rates in the Market

Understanding the difference between Commercial Exchange, Tourism Exchange, and the PTAX Rate is fundamental for anyone or any company dealing with foreign currency in Brazil. Although all refer to the price of the dollar (or another currency), they are used in different contexts and have different values:

Commercial Exchange and Tourism Exchange

Directly, the main difference is in the purpose of use and, consequently, in the price of each. They are, in practice, two different quotations for the same currency, applied in different situations.

  • Commercial Exchange: This is the exchange rate used as a reference in the financial market for large commercial and financial operations; we can think of it as the wholesale price of the currency carried out in the interbank market.
  • Tourism Exchange: This is the exchange rate that the average person finds daily for non-commercial operations; we can consider it the retail price of the currency carried out in the primary market.

PTAX Rate

PTAX is not a trading rate that you can buy or sell at, but rather an official reference rate, calculated and published by the Central Bank of Brazil.

The calculation is made by the average of the commercial exchange rates practiced by the main banks throughout the day. The Central Bank conducts four rate surveys during the day to calculate this average.

Exchange Modalities

The modality in the context of exchange defines the structural rules of the operation, mainly the settlement period (the actual exchange of money).

The main modalities are:

Spot Exchange

This is the most common modality. The rate is locked in today and settlement (delivery of the currencies) occurs in a very short period, up to 2 business days. It is used for immediate needs.

Example

Consider the scenario of an importer who needs to pay an invoice of US$ 50,000 to a supplier abroad, due in 2 days.

The company's finance department contacts its bank, "locks in the exchange" at the current commercial selling rate (e.g., R$ 5.28) and arranges payment of the corresponding amount in reais (R$ 264,000). The rate is guaranteed and the bank sends the US$ 50,000 to the supplier, settling the operation within up to 2 business days and paying off the company's debt.

Forward Exchange

This is an operation contracted today, with a pre-defined rate, but for settlement on a future date (more than 2 business days). It is used as a protection instrument (hedge) against currency variation.

Example

Now consider a scenario of an exporting company that will receive US$ 1 million in 90 days and fears a drop in the dollar rate, which would reduce its revenue in reais.

To protect itself, the company contacts its bank and "locks in" a future selling rate today, for example, R$ 5.35, committing to sell the dollars at this price on the agreed date.

In 90 days, regardless of the dollar's value in the market, the company will receive the agreed R$ 5,350,000. It has eliminated the risk of exchange rate variation and ensured predictable revenue.

Note: we will address more about forward exchange and hedging in later sections.