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Article
Foreign Currency Exchange Strategies
September 1, 2005 By: Guido Schulz Paperboard PackagingWhether converters import or export, they can improve their bottom lines and business relationships by using a foreign exchange risk management plan.
In the past, U.S. companies conducted business abroad in U.S. dollars. The advantage was clear; this approach placed the burden of the foreign exchange risk on the shoulders of the foreign customer. Today, savvy overseas partners and domestic brokers are less willing to accept the added cost of converting funds.
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If your sources for machinery such as corrugators, unitizing equipment and machines used for folding, gluing and printing allow you to lock in a rate of exchange when making a payment in foreign currency, you should take advantage of it. This way you immediately know the exact U.S. dollar amount of the foreign currency required, and the risk of sending too much, too little, or of being re-billed is eliminated. In addition to saving money, you build a better relationship with suppliers, as they receive immediate payment without paying an expensive conversion fee.
Often, suppliers send an invoice with the U.S. dollar equivalent calculated for the customer. Customers who remit this amount can be sure that the supplier has built in an added amount to guard against dramatic rate fluctuations and high conversion fees in order to ensure a profit margin.
By paying in U.S. dollars, a buyer most likely spends more than the equivalent cost in the foreign currency. The solution is to ask your supplier to quote a price in both foreign currency and the U.S. dollar amount. You can compare the two and pay the lowest price.
Locking in Profits
Once your company has committed to conducting a transaction in a foreign currency, you are exposed to market fluctuations. There are simple ways to manage risk without undue stress.
One of the most basic means of protecting against currency exposure for a pending financial transaction is buying or selling funds "forward," using a forward contract. With a forward contract, you lock in a current rate of exchange on the payment for goods you have contracted to buy in the future. This way you know what the funds will cost when you convert the currency at a future date.
Once the exchange rate is established, the U.S. dollar amount is set, regardless of subsequent market movements, which can amount to five percent during a single month. A fixed rate allows manufacturers to keep currency flux from eroding profits.
In addition to forward contracts, converters also may be able to leverage standing orders as a risk management tool. Standing orders require a foreign exchange specialist to monitor the market and act on the client's request to buy foreign currency at a target rate.
Sophisticated Monitoring
Because currency rates fluctuate from minute to minute, staying informed about the foreign currency market is a fundamental prerequisite for effectively managing foreign exchange. Numerous variables such as economic indicators and social events impact the foreign exchange market and account for currency volatility.
By staying abreast of pertinent news, managers can time transactions to coincide with favorable market conditions and thereby increase savings.
