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February 14, 2020 | Business Success

Leverage Foreign Exchange in a Global Marketplace

Hedge exposure and mitigate foreign currency risk as your international commerce grows

As e-commerce platforms like amazon.com make it possible for businesses of every size to transact globally, you may be missing a growth opportunity if you’re not buying or selling internationally. Don’t let navigating foreign exchange be an obstacle to growing your customer base or supply chain. A bank partner with international business expertise can help you leverage the foreign exchange (FX) market—an over-the-counter global marketplace that determines the exchange rate for currencies around the world. Available 24 hours on weekdays, FX trading volume is by far the largest market in the world. Here’s how FX can benefit your business.

 

Trade in the currency of your consumers

Consumers want to purchase products in their own currency, and suppliers want to sell in their own currency. Limiting your business trade to dollars could significantly limit your growth opportunities in markets outside the U.S. When you’re prepared to transact in foreign currencies, you can extend your reach. A variety of banking safeguards can help protect the value of every dollar you spend and earn.

 

Hedge to lock your exchange rate

As the currency exchange rate fluctuates, hedging can help you mitigate exposure. A hedge is a forward contract that allows your business to lock in an exchange rate today for a delivery in the future — such as 30, 60, or 90 days after the transaction, or even up to a year. This means you can anticipate the amount of the payable or receivable in dollars when the purchase or sale happens. Your business can customize this over-the-counter product to set the terms for any delivery day, and for any amount you need (compared to the Chicago mercantile exchange that specifies both unit amounts and when the contract matures.)

At Umpqua Bank, minimum transactions for hedges are $25,000 USD, but there is no minimum for incoming or outgoing foreign currency wires. Marc Wolpert, SVP, Foreign Exchange Sales Manager, Umpqua Bank advises, “Even when transactions are too small to hedge, you should still consider transacting in local currency, as this allows your business to dictate terms, instead of your supplier or customer. Your bankers can help you each step of the way.” 

 

Consider foreign currency demand accounts

If your business is buying and selling in a particular currency, you should consider opening a foreign currency demand account (FCDA). FCDAs are international bank accounts that enable businesses to use receivables to make payables in a foreign currency—without the hassle or fees of converting to dollars for each transaction. With each FCDA dedicated to a single foreign currency, a typical small business trading globally might have one or two such accounts to facilitate trade with partners in countries such as Canada, Japan, Mexico, Great Britain, and China.

 

Secure a reliable supply chain

Equally important to safeguarding transaction costs is securing your trade relationships. Importers benefit from purchasing on an open-accounts basis, whereas exporters typically prefer to be paid in advance. A bank partner with international business expertise can help build trust and reduce risk with products and protections like these:

  • Letter of credit. Importers purchasing with a letter of credit benefit from nuanced support tailored to your business goals. The right bank can help you craft the letter of credit. You will want to work with your logistics partner to make sure that the documents required under the letter of credit allow for easy clearance of the goods through customs. When applying for a letter of credit, you define the price of the goods, shipping dates, and length of time the letter of credit is available to your supplier.
    Exporters want prompt payment after shipping goods and the assurance that the issuing bank will pay, rather than relying on the buyer to pay. The right bank can be an advocate for your letters of credit and provide quick turnaround and support for your transactions.
  • Documentary collections. Whether importing or exporting, streamline your international collection process and lower your risk with a bank that can manage your documents and payments.
  • Credit insurance. If you are selling on an open account basis domestically or internationally, you can buy credit insurance to insure your receivables for up to 90% coverage on the dollar. This can be a valuable protection in the early stages of a trade relationship until trust is established.

 

Partner with an institution that understands your global needs

In a volatile international market, it can be difficult to identify the best opportunities for transacting in foreign currencies—while ensuring you have the proper protections in place. Partnering with an institution that specializes in foreign exchange and also understands your global needs can help your business hedge exposure and mitigate foreign currency risk as your global commerce grows. Learn more about international banking with Umpqua Bank.