A price you agree with a customer or supplier on one day could rise or fall if the exchange rate changes. By doing nothing, you are gambling your way, which can lead you to losses. This is especially true in the current economic climate where currency is fluctuating daily making it more difficult to keep track of exchange rates. These situations can possibly arise:
- if you‘re importing those ‗goods priced in Chinese Yuan that forms part of goods you‘re selling in US dollars, you‘ll need to decide how to price those goods to reflect the exchange rate.
- The exchange rate changes before delivery after both parties agreed on the price of the imported clothing.
To mitigate import-export financial risk, you can do any of the following:
- Take up a forward foreign exchange contract – work with a bank or financial organization to fix the exchange rate of the contract. For instance, if you will require 100,000 yuan for your goods order in 12-month time. 1 Yuan might currently be worth
15 US cent, and this supply would theoretically cost USD$15,000. What if the Chinese Yuan increases in value against the US dollar to 1 Yuan against 20 US cent? This supply may then cost you USD$20,000. With a forward foreign exchange contract in place, you can buy 100,000 Yuan for USD$18,000 on a specified date. If your judgment is wrong, you may lose out though. Ultimately, this contract can give you greater peace of mind since you can budget for future uncertainty.
- Use currency options – similar to the forward foreign exchange contract, many banks offer this alternative. But, currency options come with a premium price for maximum flexibility. The exact amount will depend on the amount of currency involved, the
exchange rate, and the length of the option and may typically be in the region of 1 or 2 per cent of the face value of the importing contract.
- Open a foreign currency account – this option is suitable for frequent dealings in a particular currency and allows you as an importer to have greater control in the hedging bets. You can keep your commission or profit earned in the account and move the money when the exchange rate favors your market position.
As an importer, you may face embargoes, or quotas on imported goods. The best way to avoid such risk is to plan ahead by discussing your situation with your nearest Chamber of Commerce.
Managing international deliveries and payments can be a complex affair. What if your importing orders took longer to deliver? What if you have to incur costs such as raw materials when the customer receives the goods and delayed payment for them? What if your orders arrive late or damaged?
To reduce the operational risk, one can:
- Communicate upfront to potential buyers that you need payment in advance because you are in business.
- Under promise a delivery date and over deliver to delight your customers – this gives you leeway if anything goes wrong.
- Get trade references or work with a factory audit firm to verify your suppliers it is best if you can visit and inspect the factory yourself at least 3 times a year.
- Work with reputable couriers who have offices and depots in your trading market, so that you can track the consignment more effectively.
- Negotiate for an insurance policy that provides a flat rate charge on consignments rather than an annual premium to cover non-paying customers, product defects, and potential losses or damages in land, sea and goods.
Dealing with a different language and business culture can increase the risk of confusion and potential negotiation problems. For example, you may experience difficulty explaining the technicalities of your goods requirement over the phone with the Chinese suppliers. To reduce cultural risk, one can try to learn the culture and language of the country he will import from.