The myths of foreign exchange
While some U.S. companies avoid doing business in the currency of a foreign vendor or customer outside the United States due to the perceived risks of the foreign currency market, paying exclusively in U.S. dollars may be actually be a riskier proposition.
Having a “dollar-only” strategy may accentuate risk. Transacting global business solely in U.S. dollars may appear to be a “safe” alternative, but doing so means your company is completely exposed to the dollar’s value. Furthermore, unless your business has the market cornered for a particular good or service, enabling you the luxury of transacting exclusively in the U.S. dollar, your competitors likely will have an edge. To remain competitive, many companies offer the flexibility of conducting business in different currencies.
Photo courtesy Katie Price
Are you paying too much for foreign goods? If your company purchases products from foreign companies and you regularly pay for those products in U.S. dollars, you may be paying more than you have to. It’s common practice for international vendors who accept payments in U.S. dollars to add a “risk premium” of 5% to 10% of the total cost to your U.S. dollar invoice. Vendors typically insist on this add-on for taking on the currency risk. A company, with the assistance of a bank with currency risk management expertise, can effectively manage its currency transactions, and most importantly, the cost.
Suppose you purchase equipment from a German company that agrees to accept payment in U.S. dollars instead of euros. If the dollar strengthens versus the euro during the reporting period, not only will you overpay for the German equipment (because you could have purchased euros at a lower cost), you will still incur the “risk premium.” Being willing to change longstanding practices could produce significant cost savings.
Mark Way is a SVP and Foreign Exchange Specialist with Bank of Oklahoma. His expertise is helping companies develop solid business practices when conducting business outside the U.S.