How-to Save Money When Doing Business Internationally – Part Two

In part one of this article we discussed some things to keep in mind as you expand your business internationally, namely paying attention to exchange rates, researching low cost international money transfer options, and finding the right foreign bank account which offers you great service at a reasonable rate. Today we focus on another aspect of saving money when doing business overseas; hedging.

There are a number of ways you can hedge against the ups and downs in foreign currency exchange rates to ensure you are always getting the value needed for you goods.

 

Forward Currency Contracts

A forward currency contract lets you lock in a set exchange rate ahead of time. They can be used for protection if you are accepting large payments in a foreign currency and are worried the exchange rate might move against you. Once you purchase a currency forward contract, you get the agreed upon value for your foreign currency when the time comes no matter the current market rate.

The downside of using a forward contract is if you misjudge the market and the exchange rate improves when you are expecting it to plummet, you won’t be privy to the benefits. To learn more about forward currency contracts and how they are used, read “Using Currency Forward Contracts to Save on Large International Money Transfers”

 

Currency Options

Currency options are more flexible than forward contracts. With a currency option you have the right to buy or sell a particular foreign currency at a set rate on or before a specified date. The main difference with the currency option vs. a forward contract is flexibility. Unlike a forward contract, with an option you can choose not to go ahead with the exchange and keep your money in whatever form you currently hold it.

Because of the added flexibility you get with a currency option, you’ll be paying a higher premium for the deal; usually 1% or 2% over the value of the contract. If the foreign currency exchange rate goes down by 3% or 4% though, you’ll come out smelling like roses.

Currency options are best for large deals that may not ever go through. If you are unsure if the deal is going to work out, a forward currency contract is not a good choice as you’ll be stuck exchanging your cash even if you don’t want or need to. With a currency option you can choose not to exchange your money or use the spot exchange rate instead.

 

Holding a Foreign Currency

As long as you’ve set up a foreign bank account, you have a third option to hedge against poor exchange rates; holding a currency. This isn’t so much a permanent solution, but rather a temporary option that allows you to hold out until a profitable exchange rate comes around.

If there is a chance you might need the capital to cover operating costs at some time in the near future, holding a currency isn’t really a viable option as you may get stuck with an even worse exchange rate if you find yourself in a pinch and are forced to transfer your money quickly.

On the other hand, if you have staying power and are holding a foreign currency in stable economy that regularly has upswings, it can be beneficial to hold onto it for a couple of weeks or months until the currency increases in value. Holding onto a foreign currency also allows you to use it for paying bills, suppliers, etc in the country where business is being transacted which removes some of the risk involved with transferring and exchanging it. It’s less complicated than purchasing forward contracts or currency options too.

 

 

 

 

 

How-to Save Money When Doing Business Internationally – Part One

Growing your business from a domestic company to an international brand is an exciting and scary endeavor. On one hand, your homegrown business that you started from scratch is poised to explode on the international market where there will be countless new ways to profit and grow, but on the flip side there will be a number of unforeseen hurdles and a steep learning curve.

After logistics, one of the trickiest aspects of expanding internationally is managing your finances. A number of things can lead to higher costs and sometimes, just a tiny mistake can mean the loss of thousands of dollars. International banking and money transfers are a large part of doing business overseas and the fees associated with them are often overlooked as the cost of doing business, but they don’t have to be. There are a variety of things you can do to save money while growing your business overseas.

 

Keep an Eye on the Exchange Rate

Doing business internationally leads to unexpected ups and downs in your cash flow based on exchange rate swings. If you have a slim profit margin, this is doubly important. Exchange rates can work with you or against you depending on your timing and it’s vital to remember they change daily. Timing your currency transfers whether hourly, daily, or weekly, to align with the best exchange rate can equal to big savings.

In addition to keeping an eye on the daily swings in the exchange rate, there are a number of things you can do to hedge against negative currency moves. You can use forward currency contracts to lock in a specific exchange rate or set up a currency option. Check out part two of this article to learn about the ins and outs of these options more fully.

You’ll find out that at times it will be better to accept payments in a foreign currency and other times it’s best to accept payment in USD. Just make sure you discuss and agree with your clients upfront about the type of currency you’ll be accepting.

 

Don’t Forget About Banking and International Transfer Fees

The basics of international banking are very similar to domestic banking, but the fees associated with the services vary greatly. Take the time to fully explore your options to find out which institutions offer the best services at the lowest cost.

Even if you have a foreign bank account and credit card, at some point you’ll either need to send money abroad or want to take some of your profits back home. This is where you can really get whacked with international transfer fees from the large banks. Despite having an overseas bank account, it’s often best to use foreign exchange transfer services like Xoom or World First for your international money transfer. They offer better exchange rates than banks, usually by 3% or 4%, and the fess will be lower too. Many offer large international money transfers at no cost too.

 

The Takeaway

Expanding your business overseas is going to take a lot of moxy, a touch of knowhow, and maybe even a bit of luck. If you are smart about it and plan correctly though, the positives will far outweigh the downsides.

 

 

 

 

 

 

Use Currency Forward Contracts to Save on Large International Money Transfers

If you are looking to save money and get the most out of your international money transfer, consider using a currency forward contract. Most people who send money abroad place what is called a spot trade. This means the trade is executed immediately at whatever the current exchange rate happens to be, but people who regularly send money overseas know that getting a good exchange rate can equal to be savings and luckily, there’s way to ensure that you do.

The problem with spot trades comes from the fluid nature of currency exchange rates. Because the value of one currency against another is always fluctuating, you never know if you are going to get a good deal when the time comes to transfer your money overseas and into another currency. Currency forward contracts aren’t subject to that same problem.

 

What is a Currency Forward Contract

In simple terms, a currency forward contract is a way of locking in an exchange rate ahead of time; before the trade ever happens. This can be very beneficial if you are a person or business that regularly transfers money overseas or know of a large international money transfer need in advance.

A currency forward contract works by connecting two parties in need of exchanging money. This doesn’t mean you’ll actually be put in contact with the other party; the foreign exchange firm will handle all of that. Both parties involved agree to the exchange rate they are willing to accept at a future date, which could anywhere from a single day to a few years in advance. Once the set date is hit, the transaction is executed at the agreed upon exchange rate regardless of the current market rates

 

Benefits of a Currency Forward Contract

Currency forward contracts are a way to hedge against the value of a currency dropping at a later date. It can be incredibly useful if you are working with a currency that has a tendency towards massive rate fluctuations. You can protect yourself against an unfavorable spot trade rate at a future date. It’s a valuable way of insuring a good exchange rate if you are planning a large international money transfer such as a house, property, or business purchase in the future.

Most companies that regularly do business overseas use currency forward contracts as way of ensuring a predictable cash flow and hedging against sudden currency drops which could have negative consequences.

For example, imagine a US importer is doing business with a Chinese manufacturing firm. They have a contract to purchase a large amount of products from the manufacturing firm in six months time and the currency for that transaction will be the Chinese Yuan. If the American importer thinks the value of the dollar may fall against the Yuan over the next six months, he can execute a currency forward contract which locks in a rate to purchase the Yuan in six months time. This leaves the American importer fully protected if the USD depreciates in value.

It works the same way for you if you’re planning a large overseas money transfer in the future. Lock in your rates using a currency forward contract and be assured you’ll get a good value for your dollar when the time comes.