Foreign exchange rate exposure – Intro

International companies sell goods to overseas customers and they receive payments in the customer’s currency. For instance, a company that operates and reports in EUR made a sale to a customer in the United States for 1 000 USD. That company is subject to the risks resulting from fluctuations in the USD/EUR exchange rate.

However, I would say it is a mistake to think that currency risk is limited to multinational companies.

As a result, they need to cover the financial risk on the exchange rate from order date to payment date.

They can use Forex contracts but they are several types of them :

  • Spot contracts: you are quoted an exchange rate and have a couple of days to send the funds to the broker
  • Forward contracts: It is an agreement to exchange currencies at a specified rate (forward rate) on a stipulated future date (settlement date or payment date).

The forward contract is the most commonly used to hedge purchase or sales orders.

Sometimes you need to roll over a forward contract which means that the issuer closes the current position and simultaneously opens another one with the new maturity date. It may occur when you agree to expand the payment terms on the order after it is invoiced or when you have an early settlement but in that case the payment is settled before its due date.

FireApps is a system specialised in reducing Fx risks and it can be integrated with D365 F&O. An out of the box interface will be available soon.

If you have any questions, please contact us.

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