How to control currency rate risks

How to control currency rate risks
Carole Muller
Denmark
Local time: 19:49
English to French
+ ...
 Dec 4, 2001

Hi \"Pro\",

You can start as Ralf and Werner say by evaluating the risk. However people tend to go blind on percentage when evalutating risks. If your client\'s currency is EURO, even a 10 percent fluctuation (likely to happen) between US/EURO may result in substantial revenue lost. If your project is large and amounts to say a total invoice of 3,000 USD, your revenue loss would be 300 USD blown away for no reason.

STEP 1: evaluate the risk (i.e. the extent of revenue loss) by doing

1.a. define the currency exchange risk to your US-based business(the percentage your foreign client\'s currency may fall/the percentage the dollar may increase). For instance around Janyary1, 2002 we Europeans -most of us DK and UK and Sweden are sitting and watching before they decide if they want to get wet- are going EURO. Nobody knows what will happen \"right on\" January 1 to currency rates and when it will stabilize. Nothing big and dramatic but maybe surprises during a period of time.

End of step 1.a: how many foreign currency units per dollar on date XX you THINK you get by the official rate on date XX(the date you bill your client)

1.b.: use the rate in 1.a. and calculate how this rate gives you more/less dollars than the surrent rate.

1.c: use 1.b. to calculate how much more revenue/less revenue you may/may not get when the client honours the bill.

STEP 2: based ont his decide:

Option 1: the risk is acceptable, the revenue loss (hehe or gain don\'t forget)is something you can live with given the size of the assignment or the relations to be created with the client

Option 2: the risk is intermediary.

Insert a small sentence on your offer and on your invoice \"The total amount to be invoiced as stated in this offer is based on the exchange rate between USD and your currency dated DD(date of offer). In case the US/XX currency rate fluctuates more than Z %, we will invoice you in your currency based on the revised currency rates applicable on the day of invoicing\"

and on the invoice insert:

\"The amount payable in your currency was based on Offer XX dated DD and was based on the exchange rate dated DD. Regrettably and referring to Note 1 in the offer, and due to the necesary exchange rate revision, the total amount payable in your currency is increased by (increase percentage, make sure it is above Z %)

The client may get angry -hoping to load the risk on to you.

So to keep the client happy you have

Option 3: same text. Just add increase/decrease in your favour. You split the risk with the client 50-50 and the client is attracted if they are gamblers. (if not, they\'ll protest and you will know they are indeed not gamblers or they have heard rumours their currency might plunge).

...then you can either draw back and position yourself on Option 1, or you can try and make them understand your point of view( and you may in the process lose the client).

Option 4: Depending on what are your future revenues, some commercial banks will cover the risk for you if you sign up for an insurance-type scheme protecting your revenues. Depends on the size of the order. You pay a fee ( a percentage usually calculated on the same line of thinking as steps described above)

Option 5: Risk is very high (very likely to happen)and impact is likely to hurt(an important fluctuation in %). No bank will cover and you run a major risk. Are you a gambler? How much do you need this client? Only you can truly know what is best.

Hope this helps further, besides the other nice advice.

Carole

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How to control currency rate risks

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