Before the National Day, the central parity of the RMB rose to 6.7351, setting a new high; after the holiday, the high probability of opening will continue to be strong. For factory foreign trade orders with low profit margins, a 2% exchange rate change can eliminate half of the profit of a order in two to three months from the quotation to the collection of foreign exchange. This article talks about three things: how to write the exchange rate terms on the quotation, how to allocate exchange rate risks with customers in the contract, and what tools the factory can use to lock foreign exchange.
1. Calculate clearly first: How much profit does the exchange rate consume you?
The most common example is: the price quoted at the end of June was based on the expected exchange rate of 7.10. After the contract was signed, the RMB has strengthened all the way. Three months later, when foreign exchange was collected, the immediate price was only 6.75, and the US dollar depreciated by about 4.9%. A business with a gross profit of 15% will directly turn into around 10%, and then deduct financial expenses, it will be basically in vain. The validity period of most factories 'quotations is written as "30 days," which is the easiest length to enter the exchange rate fluctuation zone. The first step is not to find tools, but to clearly calculate the "exchange rate exposure" of your own quotation: the number of days from the quotation date to the expected date of foreign exchange collection, the amount of exposure, and the range of exchange rate fluctuations that the profit margin can withstand. After doing the calculations, you will find that many orders are destined to not make money from the moment they quote.
2. Three ways to write on the quotation
- Shorten quote validity period:Regular materials are quoted within 15 days, bulk raw materials are quoted within 7-10 days, and "Exchange rate benchmark: the middle price on the quotation day, the price will be reconfirmed when the fluctuation exceeds 1.5%."
- Prices are pegged to exchange rates:For old customers who have placed orders repeatedly for a long time, add a line directly to the quotation: the price is denominated in US dollars, and the settlement is converted according to the median price on the payment day, or it is agreed that "the US dollar price is adjusted according to the exchange rate range, and the price will be increased by Y% when it is lower than X." It is much more dignified for old customers to accept such transparent rules than to argue after the fact.
- Currency differentiation strategy:The exchange rate fluctuations of orders in euros and yen are more violent than that in the US dollar, and the validity period of non-US dollar quotations is shorter, or simply quoted in US dollars in a unified manner to allow customers to bear the local currency exchange rate risk.
3. How to discuss the exchange rate allocation clauses in the contract
When discussing exchange rate terms with customers, the position should be "shared" rather than "passed on." There are three models that can be referred to: first, fixed exchange rate plus adjustment range, where both parties agree to settle according to the contracted exchange rate, and each party will bear half of the part where the median price deviates by more than 2%; second, rolling pricing of batches of orders, with large orders not locking the total price once, pricing based on the market exchange rate on the date of each batch of shipment; third, forward exchange rate pricing, directly based on the bank's forward settlement price plus spreads, turning uncertainty into a determined cost. Calculate accounts for customers during negotiations: exchange rate clauses protect the profits of both parties. Price increases are not terrible. What is terrible is that suppliers 'profits are degraded and delivery is delayed after they are eaten by the exchange rate.
4. Locking tools that the factory can use
- Forward settlement:Sign a forward contract with a bank to lock in the exchange rate for foreign exchange settlement on a future day. Suitable for orders with large amount and fixed collection time. The threshold is credit granting or deposit payment. Small and medium-sized factories can ask from the cross-border e-commerce and special quotas for small and medium-sized foreign trade of large state-owned banks.
- Interval forward (risk reversal portfolio):Buy a put on the dollar and sell a call option, locking in an exchange rate range at zero or low cost. It is more flexible than simply long-term, but it has higher requirements on financial personnel, so try it in small quantities first.
- Natural hedging:Factories that have expenditures on imported raw materials or foreign currency use payables to hedge their receivable exposure. This is the lowest cost method and should be used in full priority.
The principle is: the proportion of foreign exchange locks follows the certainty of orders. The exposure of signed contracts and deposits received can be locked in at a high proportion; just the exposure of intended orders, don't rush to lock it. If you lock it too early, the market reverses, and you will be a real loss. Locking foreign exchange is management certainty, not a bet on direction.
5. Three common pits
- Replace "managing exchange rates" with "betting on exchange rates":I feel that RMB will be devalued and dragged on without settlement, resulting in passive shrinkage of profits lying on the account. After collecting foreign exchange, foreign exchange will be settled at the pace of business needs, and financial management will be discussed only when idle foreign currency funds are idle.
- Quotation validity period and delivery period do not match:Quotes are valid for 15 days, delivery for 90 days, and exchange rate risk exposure for 76 days is ignored. The validity period is only before signing the contract, and the exposure after signing the contract must be caught by the contract terms and locking tools.
- Forget the time difference between tax refunds and fees:The tax refund receipt period and the letter of credit negotiation time will lengthen the exposure period. When calculating the exposure, take these lags into account, and don't just focus on the shipment date.
6. Common questions
1. What should I do if a customer rejects any exchange rate terms?
Calculate exchange rate costs directly into the price and allocate them as "exchange rate reserves" while shortening the validity period of the quotation. Not talking about the terms does not mean not receiving money, but just a different method of collecting money. After a few orders are cleared, most customers will instead go back and accept the apparent pegging terms.
2. Long-term settlement requires a margin. Our factory is short of funds and cannot do it, what should we do?
Let's make full use of natural hedging first, and then talk about forward lines under bank credit-many banks have margin free or low margin lines for small and medium-sized foreign trade enterprises with tax and customs declaration records. In addition, shortening the validity period of the quotation and contract-linked clauses are a zero-cost alternative, so do it first.
3. Is RMB 6.74 now a good time to lock up foreign exchange?
No one can accurately predict the bottom of the exchange rate. The lock-in action only depends on your cost line: push backwards according to the cost exchange rate of your product (such as 6.90), as long as the forward price locks in profit above the cost line, you can lock it in batches. Batching is the key. Don't lock it all at once, and don't lock it all at once.
