Managing Foreign Exchange Fluctuations
By Michael C. Dennis, MBA, CBF

Foreign exchange rate fluctuation is one of the risks of selling internationally.

In export sales transactions, buyers and sellers rarely use the same currency, and the relative value of their respective currencies constantly changes. One of the decisions faced by U.S. exporters will be whether or not to require payment in U.S. dollars. Depending on whether the sale is denominated in the buyer's currency or the seller's currency, the buyer or the seller may incur additional costs (or lost profits) if the relative value of the two currencies change between the time the goods are sold and the time the goods are paid for. For this reason, a decision to accept payment in a foreign currency can harm the seller's profit margin.

Foreign exchange rate fluctuation is one of the risks of selling internationally. Some companies expect their credit manager to both monitor and manage this type of risk. Currency exchange rates are influenced by a variety of factors including supply and demand; interest rate differentials; economic news; political events; and government intervention and there is no single entity that regulates or controls the foreign exchange market.

Note: The simplest way for a U.S. based seller to avoid foreign exchange risk is to quote foreign customers in U.S. dollars and require payment in U.S. dollars. This way, all the risks associated with fluctuations in foreign-exchange rates are borne by the buyer. However, it is possible to be paid in a foreign currency and offset the foreign exchange risks by purchasing contracts through banks or other financial institutions that allow the seller to "hedge" against foreign exchange fluctuations.

Companies interested in hedging should know that it is complex, requires a degree of expertise, requires sound advice from an expert [possibly someone working for the exporter's bank] and that the seller will incur certain costs to hedge against significant swings in the relative values of two currencies.