International shipments with cross-border transactions are inherently exposed to forex risk: the rise or fall of a foreign currency’s value in relation to a firm’s local currency. It is vital for tech importers and exporters to hedge their transaction risk with proactive FX risk management to ensure seamless imports with no unexpected costs for the importer or underpayments for the exporter.
Key Forex Risks in Tech Trade
Forex volatility is driven by factors such as geopolitical disruptions, trade surpluses and deficits, interest rate differentials, and the economic performance of the issuing country. While currency volatility changes, some of the most volatile currency pairs for international tech trade include:
- USD/ZAR
- AUD/JPY
- GBP/AUD
- GBP/JPY
- NZD/JPY
When a company conducts business in a foreign currency, its transactions are at the mercy of currency fluctuations. Quotes are typically issued weeks or months in advance of the final shipment and purchase of hardware, allowing exchange rates to fluctuate before the commercial transaction takes place.
For example, at the time of writing, 1 United States Dollar equals 16,46 South African Rand. At publishing, just 6 days later, the rand strengthened against the dollar to 1:16,34. For a $10 million shipment, that is a fluctuation of R1.2 million, resulting in savings of approximately 0.73% for the South African buyer. While this scenario was beneficial for the importer, it reflects the budget uncertainty that currency fluctuations can create.
If the exchange rates change unfavorably, the buyer or seller will suffer a financial loss; the exporter will be paid less than expected in their local currency, or the importer will have to pay more than anticipated. This is why exchange risk hedging is important for high-value global tech deals.
So, what are the main forex risks that global tech shipments need to consider?
Transaction Risks
The most obvious forex risk for global tech importers and exporters is the transaction risk. When a vendor quotes a foreign buyer in a foreign currency, there’s no guarantee the vendor will be paid in the amount they expect in their local currency.
With proper forex risk management, vendors ensure a definite cash flow, while buyers gain certainty in how much they must pay for the hardware, no matter how foreign currencies may rise or fall between the signing of quotes and the arrival of hardware.
If your shipment gets stuck in customs, and you’re holding onto foreign currency to pay for the goods after final delivery, the exchange rate can shift during this period. This is less than ideal for cash flow.
Economic Risks & Competivitiveness
Another consideration for a commercial transaction is economic risk. If a reseller is purchasing hardware from overseas to sell in a foreign location, their FX risk management approach cannot overlook how currency fluctuations affect the competitiveness of pricing imported tech gear.
Forex can make an imported item more expensive in an export market after it is priced in the local currency, diminishing its competitiveness. Conversely, it can also lower an item’s price in an export market, making it more competitively priced.
Managing economic forex risks requires manufacturers to export to a range of markets to offset currency fluctuations, or to consider manufacturing tech locally to avoid foreign transaction risk entirely. Similarly, resellers may need to consider selling across multiple markets or buying from local manufacturers.
Global Deals Without The Currency Fluctuations
TecEx recently took on FX risks for a leading American manufacturer shipping self-service gear to a buyer in India. By structuring a compliant domestic transaction for the importer and enabling a USD payment to the seller, we mitigated forex risk and protected the buyer’s VAT recovery capabilities in India.
Forex Risk Management for Tech Firms
Hedging foreign currency risk means protecting your firm from the volatile ups and downs that can occur in foreign currencies. If your global shipment is exposed to this, your tech firm needs a plan for forex risk management. Otherwise, your profitability and reputation can suffer.
However, FX risk management can be extremely complicated. Your strategy should be determined by your firm’s risk appetite, your competitor’s strategy, and whether you are the importer or exporter in the scenario.
Most strategies are still exposed to risks like:
- Fluctuating exchange rates,
- Time-consuming administrative burdens,
- Potential loss from inaccurate predictions,
- Interest rate risk,
- Non-refundable upfront costs, and
- Capital sitting idly in foreign currencies.
Some common strategies for exchange risk hedging include:
▾ Forward Exchange Contracts
Forward Exchange Contracts are one of the most common methods of foreign exchange risk management. An FEC is a binding agreement to either buy or sell a predetermined amount of a foreign currency at a future date. No matter how the currency fluctuates between the contract signing and the future transaction, the forex rate will remain the same.
Both parties are protected from a weaker currency as:
- The importer will not be required to pay more.
- The exporter will not be paid less.
An FEC enables fixed costs, but if a deal falls through, the money must still be exchanged with the bank on the set date, creating an administrative hassle.
▾ Netting and Matching
When sales and purchases in a foreign currency are frequent, netting enables a firm to offset its incoming and outgoing forex payments, so that only the net amount is exposed to forex risks.
Matching requires a Corporate Foreign Currency (CFC) account to offset sales and purchase transactions between different firms. There’s no need to convert currencies back and forth, as it sits in the CFC.
Both matching and netting are risky strategies, as the purchases and sales must be carried out close together to effectively manage the transaction risk.
▾ Leading & Lagging
Leading refers to converting currency ahead of a transaction when a company expects the foreign currency to strengthen, while lagging refers to delaying conversion when a company expects the foreign currency to weaken.
For an importer, this aims to reduce the final amount paid in local currency. For an exporter, it aims to maximize the value of the final receipt. However, inaccurate forex predictions can be costly for both parties.
▾ Money Market Hedging
Money market hedging requires creating a foreign currency liability or asset in advance to offset a future transaction.
An exporter to the US could create a dollar liability ahead of a shipment and use the future USD payment to offset the loan. An importer might consider converting home currency into foreign currency and holding it in a foreign deposit account to allow it to grow to the exact amount quoted by the vendor by the time payment is required.
The administrative burden and interest rate risk make money-market hedging a complex undertaking.
▾ Currency Futures
A business can purchase currency futures, which closely reflect the exchange rate. These can be sold when a currency is at risk of weakening. This way, they can profit from the sale of the future and offset the forex loss.
If the changes in futures prices don’t match the underlying forex or interest rates, or don’t quite align with the timing of your deal, you may still make a loss.
▾ Options
Options are similar to FEC, but don’t obligate the company to buy or sell currency at the fixed rate. If the market rate is better, you can allow the option to lapse. However, this flexibility can only be unlocked after paying an upfront, non-refundable premium.
▾ Foreign Currency Account
Businesses can set up a Corporate Foreign Currency (FCF) account to manage and store foreign currency. It streamlines payments and facilitates natural hedging as incoming receipts can be offset with outgoing payments in foreign currency.
However, unless these transactions occur within close succession, businesses risk letting capital sit idle and unusable.
The Challenges of Forex Risk Management in Tech Shipping
While there may seem to be many options for FX risk management, additional factors complicate global commercial transactions. Many countries, such as India, Brazil, and Nigeria, have layers of regulations hindering international transactions, such as:
- Foreign remittance restrictions prevent a local buyer from remitting funds to a foreign vendor.
- Related party regulations, flagging imports from an enterprise to a foreign subsidiary.
- Local procurement and local invoicing requirements to facilitate VAT efficiencies and comply with enterprise policies.
- Challenging customs regulations that a firm may not want to take on, with or without an established local entity in the region.
The TecEx Local Invoicing Solution for FX Risk Management
If a reseller wants to close the gap between their tech and a foreign buyer, the most reliable solution is to issue a local invoice.
With our specialized solutions for complex global transactions, TecEx can act as your Importer of Record and enter your international transaction flow to enable the global seller to be paid in their currency, and the cross-border buyer to be paid in their local currency.
This localizes the global sale and mitigates FX risk by locking in the value of the goods, offering both parties certainty while also ensuring rigorous trade compliance and seamless customs clearance.
TecEx for Forex Risk Management
Do your tech imports face volatile currency fluctuations? Fill in this form and one of our shipping experts will get in touch to discuss a bespoke solution to simplify your challenging global transactions.
TecEx for Forex Risk Management
Do your tech imports face volatile currency fluctuations? Fill in this form and one of our shipping experts will get in touch to discuss a bespoke solution to simplify your challenging global transactions.
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