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Risks of foreign exchange to exporters and importers
Let’s learn more about Risks of foreign exchange to exporters and importers. Currency risk is a type of risk in international trade that arises from the fluctuation in price of one currency against another. This is a permanent risk that will remain as long as currencies remain the medium of exchange for commercial transactions. Market fluctuations of relative currency values will continue to attract the attention of the exporter, the manufacturer, the investor, the banker, the speculator, and the policy maker alike.
While doing business in foreign currency, a contract is signed and the company quotes a price for the goods using a reasonable exchange rate. However, economic events may upset even the best laid plans. Therefore, the company would ideally wish to have a strategy for dealing with exchange rate risk.
Normally export invoices are made in foreign currencies. If the exporter has invoiced as buyer’s currency, he will be subjected to risk of foreign exchange fluctuations. If the foreign currency depreciates in terms of currency of domestic country of exporter, exporter will receive lesser amount in terms of such currency of exporter’s country. In the same circumstances, if the exporter’s currency depreciates, exporter stands to gain.
If the exporter negotiated his documents with bank under Letter of Credit, the bank will be bearing the risk. However, if the exporter has sent the bill for collection, the exchange rate on the date of receipt of foreign currency in India will be given to the exporter. If export bill has discounted (purchased) also bank absorbs such exchange rate fluctuation as exporter already received his amount immediately up on such purchase. If there is intervening difference in the exchange rate between the date of giving the bill for collection and the date of realization, exporter stands to lose or gain, depending on the trend in fluctuation.
