Accepting payment in foreign currency from overseas customers can give you a significant advantage over your competition. But in addition to the obvious risks of getting paid late or not at all, adverse currency fluctuations can eliminate your profits or cause a loss.

Attempting to predict which way a currency will fluctuate and by how much is extremely risky. However, by using a foreign exchange contract, you can eliminate your risks against loss due to currency fluctuations.

How Does FX Work?

A foreign exchange (FX) contract simply is an agreement between a bank and customer to exchange dollars for an equivalent amount of foreign currency today or at some time in the future.

A forward contract allows the exporter or importer to lock in the exchange rate at a specific date when he/she expects to receive or make payment in a foreign currency. A window delivery is a variation on a forward contract that allows the contract to be exercised within a window of dates running two to three weeks. But, the exercise must occur by the latest permitted date. Currency options give their owner the right — but not the duty — to exercise the option to buy or sell at the contracted rate on a given date. Yet, the holder can still lock in a future rate.

Importer and Exporter Examples

Assume an importer purchases a Japanese product in yen with payment due in 90 days. He can wait to see what the dollar/yen rate will be on that date, or he can lock in the rate today, by buying yen forward using a FX contract. When the payment is due, he simply directs the bank to pay the yen proceeds of the contract to the supplier.

Assume an exporter is selling in euros with payment due in 30 days. To protect the U.S. dollar value of her euro receivable, she can sell the euro forward under a forward contract. When the euro payment arrives, the bank will buy the euros, exchange them for dollars at the contracted rate, and pay the exporter. By accepting euros and offering extended terms, your product likely will become more globally competitive.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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