Foreign currency for exporters

Many exporters accept payment for their goods and services in the currency of their international customers or in a third currency, for example, US dollars. There are several reasons for this, including the fact that some commodities such as oil are traded in US dollars; a buyer may prefer the price to be in a particular currency because it is more stable than their domestic currency, which basically means they do not expect it to depreciate before the contract is completed. By quoting in this currency an exporter may gain an advantage over competitors unwilling to do likewise.

However there can be problems for the exporter in terms of exchange risk, for example, an exporter may not receive the full domestic value for an order if a buyer's chosen currency has depreciated during the contract period. The exporter also needs to avoid currencies which are not convertible on the foreign exchange market.

In 1999 many members of the EU entered into a new currency called the euro which, it was hoped, would in time become a rival to the US dollar and the Japanese yen as a currency of choice for international trade. Clearly for those countries who are members, instability in the exchange rate between their countries has been removed. Companies in other countries who remain outside the euro zone can still deal in euros and many will have established euro accounts and introduced dual pricing. Box 9.7 provides further details on this new currency.

BOX 9.7: THE EURO EXPLAINED

I lie i-moc.. i urienev. w hii h i .inie into hem'; on 1 Knuuirv I1»"' .md i--i u:ivnlh Kr.nl i n v e, ;hled ,ia'i.ii;i' ot :no ( n'l ni.i.i liuirk. the I ioi.i n li.uii .md the ni,.or . u r.-ii. io-m the ii.-'.¡i.iv. .ulopting it 1 hi'-i■ other nations .i:e \u-ln.i. liels;iinn, l-nl.uid, livl.tinl ll.'.h. I uvenihoiii;', l'ortihvil ;he Nelliei'Lintls .¡ml Spam. I he >;o\ ernnienS 'mohcii i'.i\L' wo-ked ii,ml to bri'i« tlieir hi'd^d do':.' N and dilation rates im.' m iii hi ■ iiii/.n-lion \i,ih uiic .mother, -o as to integrate the Ivh.iviniit ol their ii.ilinii.il n oiiomie... u>iiKe ils mlioiliii lion it has Nvn used l"oi slink. bond ,mj .iiiwni\ m.irl eU. Nune l.ii-'.,i" loilipanii"- li..\e hrun to li.nie in euros and to mnilu'.i iheir 'i'.iimm.: hi Ihe nirieiw Ihe emo .Ms .is ||n> iomriu>n i on\ei'sion so it .1 I ,i 'man wishes to nlil.iin I rem I; Iran. the ni.u ks .lroioinei ted lo Ihe \ .ltui- in euros win. h i-. them oi\erted .o imm s I hio im\'. .ini.1 mills w ill he mhoikuej on I l.tuiiau Hand hi lnh ilill^ n.ilioni! , iirrcii.iis .»t the partiCM Mlmi; loiinlnes wilt no loiii;ei he U-...I lender, .mil

Mr Ihe emo h.r- noi lived up lo c\pc\l.itiinis a-. hein-; .i i uihthv lo mal ilie 1 dollar. It

'oniairis shakv on tlii* o\i ii.ni^f markets an.. I Vnm.ii .s Swoden .¡nil ilie UK I en Mill mil .¡He I he emo /one. i\ lul-t ( aocc is u-,idi to join when M ,u hiem, Ihe lis. ,il ioi]nii\'mollis lis iiiliire role i-- in the Iv.lan.o .uul onlv time u ill tell how ¡Ij. impoil.nno

Forward exchange market

An exporter can protect against the loss caused by fluctuating exchange rates by taking out a forward exchange contract with a bank. The exporter, invoicing a buyer in a foreign currency for payment at an agreed future date, sells those expected receipts to the bank in advance of the due payment date. The bank agrees to buy at a pre-determined forward rate of exchange, which varies according to the time of future delivery be it 1,3,6 months or longer. No money is exchanged at the time of the contract, but the exporter is guaranteed a certain amount of domestic currency in place of the foreign currency sales proceeds, no matter what exchange rate fluctuations may take place between invoicing and payment by the buyer.

The forward rate varies form the spot rate, which is the rate a bank is prepared to pay for foreign currency at any moment of time. The forward rate may be at a discount if it exchanges for less than the domestic currency spot rate, or it may be at a premium if it exchanges for more. The difference between the two rates is determined by market forces, including specifically the interest rates being paid on fixed deposits by the bank of the currencies involved.

A fixed forward rate ties in the exporter to delivering the required foreign currency to the bank on the date of maturity of the exchange contract. If the buyer defaults on payment, the exporter must still provide the correct amount, even if this means purchasing it at the spot rate. It may be possible to extend the contract and avoid this situation, but there will still be an additional cost involved. If it is not known to a precise date when the buyer will pay an option-dated contract can be entered into, which allows the exporter to deliver the foreign currency at any time between two agreed dates.

Foreign currency options

A currency option gives the exporter the right, but not the obligation, to buy or sell a specific amount of foreign currency on or before a certain date. This allows some control over the exchange rate fluctuations.

Foreign currency borrowing

An exporter can eliminate exchange rate changes by taking a loan in the same currency as that to be paid by an overseas buyer, so that expected receipts from the buyer are not affected.

Currency accounts

If the exporting company has sufficiently large and regular international transactions, then it may be economical to open accounts in the currencies of the proceeds, instead of converting them into the domestic currency. These can then be used to service international accounts and save fees on foreign exchange dealings. Box 9.8 provides an example of the services offered by one provider.

Financial End Game

Financial End Game

How to profit from the global crisis and make big bucks big time! The current global financial crisis has its roots embedded in the collapse of the subprime markets in the United States. As at October 2007 there was an estimated loss on the subprime market of approximately 250 billion. If you want to come out on top, you have come to the right place.

Get My Free Ebook


Post a comment