In 2020, the world is more connected than even the most visionary forecasters predicted at the beginning of the millennium. Every business, no matter how small or physically remote, potentially has a global market that is relatively easy to access with the right tools. And because we don’t yet have a single global currency to oil the wheels of trade, one of those vital tools is a tailored foreign exchange solution.
The solution for your business can take many forms. It may be any or all of:
- A secure way to handle foreign currency payments and receipts
- Managing foreign currency bank accounts and cash flow
- Hedging currency fluctuation risks
Managing global trade payment risk
There’s much more to importing and exporting than merely providing an international bank transaction system. Trading with local suppliers and customers can be uncertain enough, but dealing with unfamiliar and distant overseas organisations can take risk to a whole new level.
Instead of relying on their overseas customer to pay via the type of open credit account offered to trusted domestic clients, exporters can minimise their risk with a variety of payment collection services. These can range from term collection and sight collection bills of exchange (easier and cheaper where there is a degree of trust between the parties, but still with some inherent risk) to standby and documentary letters of credit (a more secure but more complex form of payment with higher fees attached).
For the importer, relying on timely overseas purchases of finished goods, parts or raw materials, the risk profile is reversed: suppliers may demand cash in advance, best avoided if possible, since a forex expert with access to the appropriate tools can help importers to offer a bill of exchange or letter of credit instead, reducing their exposure to financial uncertainty.
Managing exchange rate fluctuation risk
When you think you’ve locked in a selling price for your export products or a cost for your imports, it can be disturbing to have your profit eroded by currency exchange rates moving in the wrong direction before the settlement date. The situation is possibly worse if you need to operate one or more bank accounts in foreign currencies in order to manage your cash flow.
But you can mitigate your risk with these foreign exchange hedging tools:
- Forward Exchange Contracts (FECs)
When you need certainty about the Australian dollar equivalent of a foreign currency amount you expect to pay or receive, an FEC could be the answer. An FEC is an agreement to buy or sell a stipulated amount of foreign currency at a fixed exchange rate on an agreed future date (e.g. your expected foreign currency payment or receipt date).
- Unsecured foreign exchange
Some FECs require a collateral deposit equivalent to the value of the total currency trade contract. You can avoid this by choosing an FEC provider which does not require a collateral deposit or margin commitment.
- Foreign currency options
Parties agreeing to an FEC are obligated to exchange funds at the agreed rate on the pre-arranged date. A foreign currency option is more flexible, allowing its owner to take advantage of a favourable movement in an exchange rate by conferring a right to a certain rate, but no obligation to exercise the option.
Depending on your business situation, you might need a mix of FECs and options.
Find a forex and global trade expert
Foreign exchange and global trade are complex issues, but there’s no need to let them prevent you from tapping into the limitless potential of overseas markets. Your finance broker has experience and expertise in these matters, and can provide advice and arrange transactions, documentation, accounts and risk management to suit your particular circumstances.
Contact us today and let us explain how you can share your 2020 business vision with the world.
Original post by Bank of Queensland