This directly affects both the transaction and the operating result. Minor currency fluctuations can usually be absorbed and perhaps partly passed on to customers. But what can you do if exchange rate fluctuations are substantial? Against the Euro, the US Dollar has fluctuated between €1.39 and €1.05 between March 2014 and March 2015. Has this resulted in direct losses for your company?
The possibilities of a forward contract
As a rule, exchange rate movements of 20-30% cannot be easily passed on to customers. In a few cases, the supplier is willing to bear part of the currency loss. But in all other cases, it means acute loss of returns unless the currency risk is hedged in time. A forward contract is one way to do this.
In such a contract, the rate at which you buy or sell currency at a given time is fixed in advance. The sales result is thus no longer subject to exchange rate fluctuations. Within a bond or currency facility, banks offer customers the option of entering into forward or spot transactions. This will always require collateral or even credit deposits.
If such collateral affects working capital or liquidity, it is often undesirable, not to mention the exchange margin and any additional fees banks charge for such transactions.
The road to greater success
There are several excellent alternatives to doing forward and spot transactions. These not only leave your working capital position and banking relationship unaffected, but also provide a cost advantage. Xolv will gladly show you the way to greater success.
