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Are Foreign Currency Fears Stopping You from Exporting?

Advice to help you develop new markets in other countries.

Exporting is a growth strategy that, unfortunately, many manufacturers shy away from. Dealing with foreign currencies can seem risky and mysterious. Volatility in exchange rates can wipe out the profit from a sale. There is a whole new language of options, hedges and financial instruments. And, of course, there are fees involved.

Don't let these obstacles keep you from developing new markets in other countries. Here are some tips for successfully managing foreign currencies:

Stick to Dollars

The simplest path is to price everything in dollars and leave currency exchange to your customer, or use credit cards that convert currencies for you. This will limit your growth, however, because many customers want to do business in their local currency.

Lock In Rates

A forward contract dispels uncertainty about rate changes that could affect future cash flows. It establishes a firm obligation to buy or sell a fixed amount of foreign currency on a specific future date at a predetermined exchange rate.

Hedge Your Bets and Consider Your Options

Foreign currency options are financial instruments that can allow you to benefit from favorable market moves, and they also provide some protection against losses if the market goes the other way. Here are three types of options contracts:

  • Standard Options Foreign Currency Calls and Puts give you the right to buy or sell a fixed amount of foreign currency on a specific future date at a predetermined fixed exchange rate (strike price). Unlike a forward contract, it is not a firm obligation. A one-time upfront cash payment is usually required.
  • Range Forward Contract Foreign Currency Collars have lower or no premium costs. At the time of the contract, you will know the range of best- to worst-case rates, but the exact exchange rate is determined when the contract matures. For example, let's take a range forward contract for the euro with a 1.26 floor and 1.30 cap that expires on June 29. If at expiration the euro spot is above 1.30, you can purchase euros at no more than 1.30. If it is below 1.26, you purchase euros at 1.26. If it is between the two, you pay the market rate.
  • Participating Forward Contracts set an exact rate of exchange for a percentage of the amount of the contract. There is no limit on the upside potential of the remainder. While the worst-case rate is known up front, protecting you from adverse currency rate fluctuations, the all-in rate is determined when the contract expires. For example, a participating forward contract for the euro with a 1.30 cap and a 50 percent participation level expires on June 29. If at expiration the euro spot is above 1.30, you purchase 100 percent of your euros at 1.30. If it is below 1.30 (for example, 1.20), you purchase 50 percent of your euros at 1.30 and the balance at 1.20, for a blended rate of 1.25.

Get Expert Help

You can hire a foreign exchange advisor or turn to a knowledgeable banker. They can help you to manage foreign exchange risk more effectively, assure you of secure pricing and costs, and open opportunities to increase profits and reduce expenses. Furthermore, they can help you develop a foreign exchange risk management strategy for the new territory of international business.

 

 



The article you read was prepared for general information purposes by McMurry. These articles are for general information purposes only and are not intended to provide legal, tax, accounting or financial advice. PNC urges its customers to do independent research and to consult with financial and legal professionals before making any financial decisions.These articles may provide reference to Internet sites as a convenience to our readers. While PNC endeavors to provide resources that are reputable and safe, we cannot be held responsible for the information, products, or services obtained on such sites and will not be liable for any damages arising from your access to such sites. The content, accuracy, opinions expressed, and links provided by these resources are not investigated, verified, monitored or endorsed by PNC.