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Why dealing in foreign currency is a sound strategy

If your company conducts business internationally, whether you import or export, you may have noticed how volatile the foreign exchange markets have become recently. The dollar recently hit a 12-year high against the euro and an eight-year high against the Japanese yen.* And the Canadian and Australian dollars recently dropped to six-year lows against the U.S. dollar. The dollar has been strengthening against many emerging-markets currencies as well. A recent article in The Economist explores the reasons behind the increased volatility.

Do business in foreign currencies

If your foreign transactions are conducted exclusively in U.S. dollars, you might want to consider the potential benefits of trading in foreign currencies instead. If you are an importer, pricing orders in the local currency may lead to better margins. You may effectively eliminate the need for suppliers to “cushion” their pricing to cover against adverse foreign currency moves. This could lead to improved relationships with suppliers, as suppliers suffer when rates move adversely. When their profit margins erode, they may think twice about taking your next order.

If you’re an exporter, consider simplifying transactions for customers by offering pricing in their terms, which could win you stronger customer relationships and put you in a position to gain market share.

Consider this: You can make payments internationally with spot contracts. Settlement takes place on the spot date, typically two days following the trade date.

Hedge against harmful exchange rate movements

If you do a significant amount of business overseas, you may want to hedge your foreign exchange risk to help reduce volatility in your income statements and help more accurately forecast cash flows and ensure your profit margin. Hedging is essentially insuring yourself against a negative event (i.e., currency exchange rates move against you). There is a cost to hedge, so it may make sense in certain situations but not others. You’ll have to judge whether the benefits justify the expense.

Depending on your goals, you can choose the type of hedge that best fits your needs.

Consider this: A forward contract locks in a rate now to be used at some time in the future. Money doesn’t change hands until settlement day. The value of this hedge is the certainty it provides. It protects you from the downside of currency fluctuations, but doesn’t allow you to benefit if the currency moves in your favor. A variation of this type of contract, a window forward contract, provides the flexibility for settlement to occur within a range of dates rather than on a specific date.

Benefit from expert help

An International Banking Foreign Exchange Specialist can help you understand your options when dealing in foreign currencies so you can maximize opportunities. An experienced banker can show you how to manage risk, accelerate your cash flow, improve profitability and reduce your costs — all through sophisticated international financing solutions.

* Source: Morningstar
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The information contained herein may not represent the views and opinions of California Bank & Trust, a division of ZB, N.A. or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal or business advice.
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