Page 67 - Export and Trade

Finance

EHQH¿FLDU\ RI D VLPSOH ZULWWHQ GHPDQG IRU SD\PHQW Foreign exchange
oragainstawrittendemandaccompaniedby As a result of trading in a foreign currency, a company
documentary evidence that the sum is owing. ZLOO EH H[SRVHG WR FXUUHQF\ ULVN IURP WKH ÀXFWXDWLRQV
Abankguaranteeis,byits nature,aseparate in the exchange rate between the contract date and the
transaction from the commercial contract on which it date payment is made/received.
PD\EHEDVHG 7KHEDQN WKH JXDUDQWRU LVQRWLQDQ\ Companiesthathavetomanagethisexchangerisk
wayconnectedwithorboundbythiscontract,even are faced with three main choices:
though itmaybereferredtointheguarantee. • Do nothing and trade in the spot market as and when
Thesearethemostcommonguarantee types: the currency is required. Whilst simple to operate, it
• Tender Guarantee: To support an initial bid or provides no protection against movement in rates.
tender for a contract. • Full downside protection is afforded by the use of
• Advance Payment Guarantee: Secures repayment of )RUZDUG &RQWUDFWV ZKLFK DOORZ ¿UPV WR ERRN DQ
any monetary advance. exchange rate now for delivery sometime in the
• Performance Guarantee: &RYHUVDIDLOXUHWRIXO¿O future. This enables effective planning and price
contractual obligations. FHUWDLQW\ EXW RIIHUV QR RSSRUWXQLW\ WR EHQH¿W IURP D
• Duty Deferment Bond: Allows duty payable on favourable rate movement in the meantime.
importstobedeferred. • Premium-based products such as Currency Options
• Retention Monies Guarantee: Secures the release DQG $YHUDJH 5DWH 2SWLRQV $52 RIIHU WKH EHVW RI ERWK
of any monies withheld pending completion of a worlds by guaranteeing a ‘worst-case’ protection but
contract. allowing the holder of the option to trade in the spot
• Carnet or Customs Guarantee: Removes the need market if the rate is better.
to pay duty on goods or vehicles imported into
countries on a temporary basis. Foreign Currency Accounts
If companies regularly undertake business in a foreign
Standby Documentary Credit FXUUHQF\ WKH\ FRXOG EHQH¿W IURP D )RUHLJQ &XUUHQF\
A standby letter of credit performs a similar function Account. This is particularly true if they are both
to a bank guarantee but is issued in a format paying and receiving funds in a currency as they
corresponding to that of a Documentary Credit and can avoid the costs associated with converting the
governed by the Uniform Customs and Practice for currency each time there is a transaction.
'RFXPHQWDU\ &UHGLWV 8&3 ,Q VRPH LQVWDQFHV D Borrowing in foreign currency, repayable from
Standby Letter of Credit may be issued in accordance currency receipts, can eliminate exchange risk
with an alternative set of rules: International Standby and may be less expensive than borrowing in local
Practices, published by the International Chamber of currency. This can reduce costs and provide the ability
&RPPHUFH 3XEOLFDWLRQ 1R to tender and invoice in the buyer’s currency, making
Utilisation of a standby credit is only intended companies more competitive.
in the event of non-performance of a contractual
obligation such as goods or services not being 6WUXFWXUHG WUDGH ¿QDQFH ±
supplied as contracted. Drawings under standby ¿QDQFLQJ WKH WUDGH F\FOH
credits are usually made by means of a simple The growth in international trade has greatly
declaration of non-performance accompanied by LQFUHDVHG ERWK WKH GHPDQG IRU WUDGH ¿QDQFH DQG WKH
minimal supporting documentation. In some countries degree of sophistication with which it is delivered.
WKH 86 IRU H[DPSOH 6WDQGE\ /HWWHUV RI &UHGLW PD\ 7LPHV RI ¿QDQFLDO FULVLV LQFUHDVH WKH LPSRUWDQFH RI
be issued in preference to bank guarantees. WKLV IRUP RI ¿QDQFLQJ VWLOO IXUWKHU
7KHUH LV QRZ D PXFK JUHDWHU UDQJH RI ¿QDQFLDO
Trading in a foreign currency and managing the solutions for importers and exporters to consider
exchange risk when developing an international trading strategy.
If companies are involved in cross-border trade they But one common theme that our customers tell us is
PD\ JDLQ VLJQL¿FDQW FRPSHWLWLYH DGYDQWDJH E\ WUDGLQJ that working capital is one of their most important
in a currency of their trading partner’s choosing, which needs. Every company’s trade cycle is different and
could be the Euro, US dollars, Chinese renminbi or any the working capital requirement of any business
other currency. ÀXFWXDWHV FRQWLQXDOO\ :KHQ WKDW WUDGH F\FOH LQFOXGHV

NZ Export & Trade Handbook 2018 65