You’ve taken the plunge and expanded your online business outside the US. From Europe to Japan, you’re always looking for the next growth opportunity. But have you thought about exchange rates?
Rates are a top consideration when selling internationally. Ignoring them can be dangerous. Don’t be left to the mercy of the markets.
Selling abroad means that your customers are paying in their local currency instead of the US dollar. You then need to move that revenue back to your business at home, where you will have to exchange currencies. Keeping yourself shielded from exchange rate risk should be a key consideration for anyone selling overseas.
From back-to-school to the holiday season, most sellers see volumes pick up considerably in the second half of the year. Many of our clients report that their sales more than double during this time!
This is the perfect time to get educated about exchange rates. After all, knowledge is power. You can then take action to minimize your risk with a forward contract. Below are some FAQs on forward contracts and what they can mean for you.
What is exchange rate risk?
Exchange rate risk describes your vulnerability to movement between two currencies. As the value of a currency moves up or down, there is a direct effect on your costs when moving money cross-border.
What is a forward contract?
A forward contract (or ‘forward’) is an agreement that lets you lock the rate in now for moving your future revenues. This lets you know exactly what rate you will get when you bring your funds back, and protects you from potential downside if the rates go lower.
Locking in a rate now gives you the peace of mind that the money you have budgeted to receive with the current rate is the amount of money you’ll actually get.
How does that help my profit margins?
When you’re selling products overseas, you will price them based on local market conditions and the exchange rate between the two countries.
Currency markets are constantly moving. If that rate changes, your future disbursements may not be worth the same amount that they are now.
A forward contract can guarantee that your budgeted value remains the same by keeping your exchange rate fixed.
For example: say you budget to sell your products in the UK with a 7% profit margin based on the current exchange rate from the British pound to the US dollar. If the pound then depreciates by 3%, your profit margin is reduced to just 4%.
With a forward contract, you can guarantee that your initial 7% margin does not change just because the rates do.
How do I know if I need a forward?
Knowing if a forward is right for you will depend on your profit margins and how much risk you’re willing to take.
You can insulate yourself by booking forwards to cover your incoming revenues, but you don’t have to put all your eggs in one basket. Some businesses will diversify their risk and enter into a forward contract that covers a portion of their expected revenue, rather than the whole sum.
What do I pay upfront?
Forwards work largely on a buy now, pay later basis. You pay 10% upfront to cover the deposit and secure the rate. When your disbursement arrives, we use that forward contract to move your funds over at the rate you locked in. Now the contract is complete, and we can return the deposit to you.
Do I have to use the contract?
Yes. Once you lock in the rate and book the forward, you must fulfill it.
What happens when the rates move?
Regardless if the rates move up or down, your rate remains the same. This gives you complete control and assurance of how your funds will be converted.
Throughout the life of your contract, the market could move against you. Should this happen, we may request additional deposit. This does not change the rate you locked in. Additional deposit can be used toward the balance owed or returned if conditions improve. Regardless, a forward is contractual and must be used by the value date.
How do I find out more?
We’d love to discuss whether a forward contract is right for you.
Give us a call at 737.226.5226 or send an email to firstname.lastname@example.org.
Already a client? Get in touch with your account manager today!
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