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Global currency certificates can be used by companies when dealing with overseas payments. They fix the future exchange rate used until the certificate expires. This mitigates the risk of the foreign exchange rate worsening.
Using currency certificates can save money, but they can also add cost and complexity.
|🔍 Read on to find out:
A global currency certificate fixes the future currency exchange rate for a transaction. It gives the right to convert a specified amount of one currency into another currency at the fixed rate. The holder can do this up to a set expiration date.
These certificates are often used in international trade. They help companies mitigate exchange rate risk by protecting from rate fluctuations.
Currency certificates and forward contracts are similar. A forward contract locks in the future price for any asset. A currency certificate is only used to fix the exchange rate.
Global currency certificates mitigate exchange rate risk. Any company entering into an agreement in a different currency can choose to buy a certificate.
Currency certificates are useful for higher-value transactions. A shift in the exchange rate would cause a greater loss. Likewise, use is also more likely when the expected time to payment is longer. A longer period brings an increased risk of exchange rate changes.
For smaller amounts, where the risk of loss is not as great, it can be more hassle than it’s worth to create a currency certificate.
A company purchasing a currency certificate does not have to use it. If the exchange rate is more favorable at the time of payment, it can decide not to redeem the certificate.
To see how a currency certificate works, consider the case of a small business in the United States buying wholesale goods from Europe. The business needs to pay a European shipping supplier. The invoice is for payment in Euros with a Net 90 payment term.
The exchange rate could worsen over those 90 days. To protect against this, the company decides to use a currency certificate. This fixes the USD/EUR exchange rate at the current rate for payment within 90 days.
When the invoice is due, the rate has indeed worsened. The certificate allows the company to convert to Euros at the agreed rate.
As another example, consider the same US company paying an independent contractor in India. The US company uses a currency certificate to fix a future fixed rate for USD to INR exchange. In this case, the rate improves when the invoice becomes payable.
The company is not bound to use the certificate. Instead, it takes advantage of the more favorable exchange rate.
Currency certificates work the other way as well. For example, the company may have incoming cash flow due in INR. It can use a currency certificate to protect against the rate worsening when it converts the INR business revenue to USD.
Global currency certificates are useful for companies doing business abroad. They have advantages, but can also add complexity and cost.
Wise Business is here to help with international payments – whenever you need to make them. When sending an international transfer, Wise will always tell you how long the rate is guaranteed for. You’ll always get the real mid-market rate, with no hidden fees.
Wise is the cheap & easy way to manage your international business. You can make international business payments in over 50 currencies and even save up 19x compared to PayPal.
You can also hold major foreign currencies with Wise Business. This allows you to exchange currencies at the desired rate, and keep that currency in your account until you need to make the payment.
You can even set an exchange rate alert, to stay up-to-date on the currency rate.
This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.
We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.
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