Getting to know foreign exchange transactions

International trade (export or import) often involves foreign exchange transactions. This is the case for transactions carried out with partners that are outside the eurozone and for which the conversion of foreign currency into euro or vice versa is necessary to pay the invoice and to properly complete the commercial transaction.

A foreign exchange transaction involves exchanging one currency for another at a certain exchange rate and on a specific date. This transaction can be carried out via a bank account transaction or in cash (called a physical exchange).

Who is concerned

Available to the self-employed and any type of business, foreign exchange transactions apply in the following situations:

  • exports of goods (raw materials, semi-finished products, merchandise) and services to customers who pay in a currency other than the euro;
  • imports of goods and services from suppliers that do not accept the euro as a means of payment;
  • purchase of production equipment from a foreign supplier that wants to be paid in a currency other than the euro.

Prerequisites

It is essential to have sufficient funds in cash or in a bank account and to know the exchange rate applicable to the foreign exchange transaction in order to guarantee the proper completion of the commercial transaction.

How to proceed

Exchange rate

The exchange rate between 2 currencies determines the value of one currency in terms of the other. The exchange rate between 2 currencies is quoted on the foreign exchange market and varies depending on supply and demand for each of the 2 currencies in question.

The exchange rate can be quoted in 2 different ways:

  • the 'spot' rate – the currency is converted immediately into foreign currency, with the exchange carried out within 2 working days of the negotiation date;
  • the 'forward' rate – the conversion of the currency into foreign currency is agreed upon today and will be carried out at a future date, with the future exchange being carried out at least 3 working days after the negotiation date.

Exchange rate fluctuations

Exchange rate fluctuations can affect the profitability of a business on various levels:

  • foreign exchange risk: businesses carrying out international transactions in foreign currencies and that have unhedged positions expose themselves to the risk of loss in the event of unfavourable exchange rate fluctuations;
  • risk of loss of competitiveness: the direct influence of exchange rates on sale or purchase prices can make a business more or less competitive than a foreign competitor.

Types of foreign exchange hedging

There are different types of foreign exchange hedges:

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