ONLINE CERTIFICATE IN EXPORT MANAGEMENT 2012

COURSE 6. RECEIVING PAYMENT FOR YOUR EXPORT SALES

HEDGING AGAINST FOREIGN CURRENCY FLUCTUATIONS
IN AN OPEN ACCOUNT EXPORT SALE

When to use hedging Most exporters like to sell their goods overseas at a pre-determined profit margin. This can be accomplished by requiring payment in U.S. dollars only. However, this may not be acceptable to certain foreign buyers - and those exporters may lose lucrative sales to more aggressive U. S. or foreign competitors who are willing to accept payment in currencies other than the U. S. Dollar. (This is becoming more common as the value of the U. S. Dollar continues to drop.) You can resolve this potentially serious problem by hedging in a number of world currencies. 1. Exporter receives order from the importer     requesting payment in a foreign currency: Exporter receives an order from a foreign buyer for US$10,000 requesting 90-day credit terms and payment in a foreign currency. The exporter determines from their bank how many foreign currency units they must receive from the importer to equal the US$10,000 selling price. The most current exchange rate is 2 for 1, i.e., two units of the foreign currency equal US$1.00. 2. Exporter accepts order payable in     foreign currency and advises importer: Exporter multiplies the US$10,000 value of the order by two (exchange rate). The equivalent price will be 20,000 foreign currency units. Exporter advises importer that they will accept payment of 20,000 foreign units in exactly 90 days. Exporter asks the importer to provide written acceptance of this arrangement - so that the exporter can secure a guaranteed exchange rate from their bank if they submit the 20,000 foreign currency units in exactly 90 days. 3. Exporter executes a foreign exchange     contract with the exporter's bank: Upon receipt of the buyer's written acceptance of the order and payment terms, exporter executes a Foreign Exchange Contract with their bank in which they agree to sell the 20,000 foreign currency units that they will receive from the importer to their bank in exactly 90 days at a locked-in rate of two to one or US$10,000. In doing so, the exporter retains their profit margin by eliminating the uncertainty of currency fluctuations in the transaction. 4. Foreign currency units are presented to the     exporter's bank for payment in U. S. Dollars: In exactly ninety days, importer pays 20,000 foreign currency units to exporter's corresponding bank in the importer's country. This amount is then forwarded to the exporter's bank in the United States - which applies the locked-in exchange rate of 2 to 1 and deposits US$10,000 less their fees into the exporter's account.

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