How to reduce the impact of exchange rates

As an exporter, it’s important for you to understand that exchange rates can change quickly. If you invoice your export customers in their local currency and the exchange rate changes against you, this can reduce your profit. You’ll need to decide how to protect your business against changing exchange rates.

Reducing exchange rate risks

When you hold any foreign currency, or if you’ll be paid in a foreign currency, there are three key exchange rate risks to be aware of, as follows.

  • Transaction risk, when the exchange rate changes between the date the price is agreed and the date payment is made.
  • Translation risk, when your balance sheet assets and liabilities are expressed in a foreign currency.
  • Economic risk, where long-term currency movements can affect the viability of your export activity.

Talk to us about how to protect your profits from fluctuating foreign exchange rates. You can choose from our range of risk reducing options, which include:

  • Setting up a Foreign-currency account so you can accept payments or pay bills in a foreign currency. You can use multiple Foreign-currency accounts if required.
  • Using a Forward Exchange Contract to buy one currency amount and sell another at a fixed exchange rate on an agreed future date. This means you know exactly how many NZD you’ll pay for imports or receive for exports, and you can protect your business when exchange rates turn for the worse.
  • Using a Currency option, where you can protect a certain exchange rate but also be able to participate if market rates move in your favour.
  • Placing a market order. This allows you to request a foreign exchange conversion for a particular amount and exchange rate. You don’t need to constantly monitor the currency markets as your order will be filled if the market reaches the required level.
Payment options to reduce risks

It’s also important to consider which payment options to use to make sure you get paid, and to avoid payment delays, which can affect your cash flow. For example, if a customer is late to pay you, the exchange rate may have moved against you.

There are four main payment methods and we can help you to understand these and choose the option that best suits your business.

  • Upfront payment - Getting paid cash in advance before shipping the goods is the safest way for you to get paid, but few foreign customers may accept these payment terms. You may be able to negotiate a partial payment upfront with the remainder paid via another method.
  • Documentary letters of credit - If your customer can produce a letter of credit, they are likely to be a good trade prospect. A letter of credit is a guarantee from their bank that it will pay you on your customer’s behalf (as long as you have complied with the agreed terms and your side of the export contract).
  • Documentary collection - This is where your customer agrees to pay you an exact amount at a time specified in your contract. This may be on sighting the bill, or a set number of days after the shipping date or a future fixed date. This is a common payment method, although with future-dated payments there is a risk that your customer may be unable or unwilling to pay your bill on the due date, but will already have the goods.
  • Normal credit terms/trading on ‘open account’ is the most commonly used method where you and your customer know and trust each other and want to eliminate the costs and administration of bills of exchange or letters of credit. Payment may be delayed by 30, 60, 90 days or longer, so your cash flow may be affected and you may need to consider currency fluctuations.

To further reduce the risk of not being paid, make sure you use credit checks and insure your goods against damage or loss.

You can also buy insurance to protect your business against overseas buyer repayment risks. This is available through the New Zealand Export Credit Office, which sells a range of Minister of Finance guarantees and credit insurances.