Importer / Exporter Guide
Importers and exporters manage currency transfers and exchange rate risk as an integral part of business operations.
Whether a small home based business or a multinational, the efficient management of foreign exchange is a critical factor in the profitability and stability of these businesses.
Risk
Companies engaged in import and export have significant risk due to exchange rate movements and volatility. Companies should, at the very least, be aware of these risks and generally should manage them to protect the company's profitability. The risk can be assessed by simple scenario analysis where, in the case of an importer, the company's committed import purchases are subject to currency 'shocks' of say 10%, 20% and 30%. These shocks highlight the potential cost that these moves would have on the company's profitability. If the impact is significant that would present a strong case for hedging the currency risks.
Forward Contracts
The most common and effective way to manage currency risk is to use forward contracts. These contracts simply allow companies to lock in exchange rates for future transfers and usually can be used for transfers up to 2 years in advance.
A simple, but common, example is an importer who orders goods on 90 day account where the goods are priced in Euros. By locking in the rate at the time the order is placed the importer knows how much the goods will cost in local currency at the time the order is placed, and avoids risking the cost of goods increasing dramatically should the Euro appreciate against the importer's local currency.
Limit Orders
Many business owners spend far too much time glued to the screen watching the market move second by second and attempting to predict future movements. These are the same people who make very important decisions for corporations and are often swayed by emotion and tempted by risk, just like any of us. It is important to remove oneself from the emotional attachment and not let these feelings drive our actions. Businesses should always have a plan that allows them to take advantage of any positive fluctuations when they are not watching especially given that most of the volatility in FX rates can occur during overnight trading sessions.
The most common way to capture these movements is through the use of Limit Orders. Placement of a limit order means you specify your desired exchange rate and should the market price fluctuate to that level, then your foreign exchange provider will automatically purchase the currency for you. While this is a common practice amongst share brokers, it is harder to find amongst currency brokers.
Getting the Best Deal
Many companies don't realise they don't need to use their bank for foreign exchange payments and forward contracts. Often companies will be getting rates that could be costing them 1-2% above what they could be getting with another provider, such as OzForex.
OzForex
OzForex, a subsidiary of Macquarie Bank, offers fantastic exchange rates and unparalleled service if you are looking to transfer money. Real time online rate booking, forward contracts, limit orders and 24 hour service, are just some of the features that make OzForex the market leader in international money transfers. Call 1300 300 424 to speak to a dealer now.
Copyright notice
Copyright 2009 OzForex Pty Ltd ABN 65 092-375-703
