International Payments

• IL
• MBO
• Studiejaar 4

Agenda

- valuta risks

- payment methods

What are 'valuta risks'?

Casus

You make a sale of  € 85.000. Your USA client receives an invoice for USD 97.750, -  (  1 € = $ 1,15). 

Payment term: 30 days after shipping (± 45 days from today) 

Q:  how many € will we receive for this sale? 

Is exchange rate early august (still)  € = $ 1,15, or $ 1,20 of $ 1,10??

$ 97.750 / 1,20 = € 81.458  ( € 3.542)

$ 97.750 / 1,15  = € 85.000 

$ 97.750 / 1,10   =  € 88.863 ( € 3.863)

Risk reducing / covering

1.  Currency forward contract 

2. Currency option contract

3. Currency clause contract

Valuta forward 

Fix exchange rate for a date over 1 month, 

5 months or e.g. 1 year. 

Today's rate  € = 1,15

Value forward rate  € = 1,165 (20/12) 

$ 97.750 / 1,165 = € 83.905

No matter exchange rate on 20/12.. higher, lower, same: 

you receive 'just' € 83.905 

Costs....

Today's rate € = $ 1,15 -> € 85.000 

Forward (fixed) rate -> € 83.905

Already an 'insurance fee' of € 1.085

+

0,25 promille / per month

(85.000/1.000 x 0,25 x 6 = € 127,50) 

Invoice $ 250.000
Cash exchange's rate (20/6) € = $ 1,15
Forward exchange rate 3 months € = $ 1,17
Cash exchange's rate 20/9 € = $ 1,13
How many € you will receive on 20/9?

1. € 217.391,-
2. € 213.675,-
3. € 221.238,-
4. €

Valuta forward contract

-> Obligation 

if forward fixed rate is worse that current 

rate at expiration date: bad luck 

Risk reducing / covering

1.  Currency forward contract 

2. Currency option contract

3. Currency clause contract

Valuta option 

Buy the right to can buy/sell a certain amount of valuta

at a certain exchange rate, at a certain date in the future. 

For example: you buy the right to sell USD 250.000 for a rate of € 1,14 for 09/22.

If the cash rate in september '22 is 1,145 , 1,15 , 1,16 etc you receive more euros thanks to you option contract 

Valuta option 

If the cash rate in september '22 is 1,10 , 1,11  (under 1,14)  you do not execute your 'option' and sell you USD 250.000 for the more favorable current rate in september '22.  

Costs....

Today's rate € = $ 1,15 -> € 217.391 

Option rate -> $ 1,165  € 214.592

€ 0,75 / $ 100

(250.000 /100 x 0,75 = € 1.875) 

Valuta option contract

-> Right

if option rate is worse that current 

rate at expiration date you do not 'use' your right so you can benefit of current 'good' rate. You only lose your paid option fee.  

Risk reducing / covering

1.  Currency forward contract 

2. Currency option contract

3. Currency clause contract

Valuta clausule in contract

-> Agreement

Exchange rate at moment of invoice has a difference of more than e.g. 3% (+ or -) at the agreed date of payment the amount of USD will be recalculated  

.  

Agenda

- valuta risks

- payment methods

'Risk' on $683.490 <-> on $ 64.840??

'Risk' on $683.490 <-> on $ 64.840??

E.g. 1.15 -> 1.17

 $ 683.490 /  1.15 =  € 594.339 

$ 683.490 / 1.17 =    € 584.179

€ 10.000 LOSS

$ 64.840 (56.382 - 55.418) =  € 964 loss

Which payment methods
do you know?

Most used methods

Payment in advance

Open account

Cash against Documents

Escrow account

Letter of Credit (L/C) 

CAD 

In this case, the supplier retains a certain amount of security as he knows that he will receive his funds before the buyers is able to clear the goods through customs. That is because once the shipment has been given to the shipping firm and a “shipped on board” bill of lading has been issued the seller can present his documents to his bank who will send them (acting only as a glorified post office) to the buyer’s bank for settlement.

  The buyer's bank will not release the documents to the buyer until payment has been made.

Major disadvantage of CAD?

Example Escrow

'tackling CAD's disadvantage'

Letter of Credit

Letter of Credit

* banks boths sides involved

* minimum level of risk

* expensive

* 'slut' risk -> time

Example L/C

Example L/C