Limiting currency risk
Do you regularly pay or get paid by customers in a currency other than the euro? The exchange rate of that currency may change between invoicing and payment. This means you could lose money, or the opposite, you could make a profit. This is known as currency risk. Read how to limit the risk of currency changes as much as possible.
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What is currency risk?
Do you do business with countries outside the eurozone? Then you are exposed to currency risk, also known as exchange rate risk. The value of foreign currencies can be lower or higher compared to the euro. For example, do you receive or pay in US dollars? Then there is a risk that the value of the amount in euros will change. Changing exchange rates can affect your profit margin.
Limit currency risk
Investigate the currency risks within your company. Are you at high risk? Then look for a suitable solution with your bank. You can limit currency risk in various ways:
1. Put a currency clause in the quote
You can include a currency clause in your price quote. This states that you can adjust the sales price to the exchange rate that applies at the time that you or your customer must pay. You can specify a minimum and maximum price. This is called bandwidth. When the price change is higher or lower than the bandwidth, the clause applies.
2. Forward transaction
A forward transaction (valutatermijntransactie) contract protects against losses if the exchange rate changes. Do you need to pay or receive a sum in a foreign currency in the future? If so, a forward transaction contract could be useful. This allows you to set the exchange rate for the foreign currency with your bank in advance. That way, you know exactly how much you will pay or receive in euros later on.
3. Currency options
A currency option gives you the right to buy a foreign currency at a certain rate. This means you can limit the currency risk, but you do pay a premium to do this. A currency option can be to your advantage if an unfavourable exchange rate at the time of payment means you will receive less money. If the exchange rate is more favourable to you at the time of payment, you do not need to use the currency option.
4. Foreign currency account
You have a foreign currency account next to your normal bank account. This is useful if you regularly pay or get paid in the same foreign currency. For example, you prevent loss of margin between purchases and sales of other currencies.
There is still an exchange rate risk with a foreign currency account. This is because the equivalent value in euros depends on the exchange rate. But you choose when you exchange your balance for euros. This can be to your advantage when there is a favourable exchange rate.