2. Most of the export and import transactions involve foreign currency like USD & Euro.
3. This foreign currency gets converted at the bank upon receipt of the proceeds.
4. The rate at which the foreign currency gets converted is known as Foreign Exchange Rate.
5. This rate keeps on fluctuating constantly.
6. The exporter at the time of costing takes into consideration an estimated exchange rate (say 1 USD = Rs 85).
7. When exporter realises the forex against the transaction and when the bank converts foreign currency into Indian rupees, there can be 3 situations:
8. The Exchange Rate is not in the control of the exporter.
9. The exporter will face the financial impact based on the fluctuation.
10. Many exporters in India are not focused on these changes and consider the amount realised in rupees as export sales.
11. However, exporters with high value / volume monitor this fluctuation very closely. They also take the help of professionals to maximise the profit and/or minimise the loss.
12. In export business, you can earn or loose this additional amount above your normal profit or loss from the goods.
13. There are several hedging tools available to exporters.
14. Exporter can also use EEFC account.
15. The Exchange Rate applied by the bank is different than the exchange rate of Customs.
16. Exchange Rate may also differ from bank to bank.
17. The Exchange Rate is also different for different types of transactions.
18. Some exporters have a ledger account titled as “Exchange Fluctuation Account” and all differences in the realisation as compared to the original amount are accounted for.
19. This is more or less an accounting treatment to understand loss or gain due to fluctuation in Exchange Rate.
20. The Exchange Rate is a complex subject and is based on many factors including political ones.
21. An exporter can acquire the required knowledge about forex and its implication in export business.
22. You can also take the help of your bank.
23. Different banks may have different rates. However, the difference will be marginal.
24. After gaining experience, an exporter can better estimate the Exchange Rate at the time of costing.
25. Experts in this field may advise the exporter to select a particular currency for specific transaction.
26. India is now advocating INR for international transaction.
27. Exports to Iran, Russia Nepal and Bhutan are being done in INR.
28. Since INR is not fully convertible, we have to depend on USD/GBP/Euro for international trade.
29. Experts and bankers study the trend and movement of Exchange Rate for predicting the future rates.
30. Those exporters whose prediction is correct or nearest to correct will benefit. There is no way to predict the exact currency exchange rate. Currency fluctuations will happen.
31. The most direct method of hedging foreign exchange risk is a forward contract, which enables the exporter to sell a set amount of foreign currency at a pre-agreed Exchange Rate.
32. The foreign exchange risk is the risk of financial impact due to Exchange Rate fluctuations. In simpler terms, foreign exchange risk is the risk that a business’ financial performance or financial position will be impacted by changes in the Exchange Rates between currencies.
33. Causes of Exchange Rate fluctuations:
|
Inflation / Recession |
nterest rates |
Current Account Deficits |
|
Public debt |
Speculation |
Political stability |
|
Terms of trade |
Government debt
|
Other factors |