Business International business

Global currency certificates: Definition and examples

Panna Kemenes

21.01.22 (updated more than 1 year ago)

Read time 2 minutes

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:
What global currency certificates are; How to use them; Some examples, and; An alternative solution for paying international bills.

What are global currency certificates?

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.

How to use currency certificates

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.

Exchange rate fluctuation

Global currency certificate examples

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.

Save Time and Money On Overseas Payments With Wise Business

Wise Business can help you save big time on international payments.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in currencies.

Signing up to Wise Business allows access to BatchTransfer which you can use to pay up to 1000 invoices in one go. This is perfect for small businesses that are managing a global team, saving a ton of time and hassle when making payments.

Some key features of Wise Business include:

Mid-market rate: Get the mid-market exchange rate with no hidden fees on international transfers
Global Account: Send money to countries and hold multiple currencies, all in one place. You can also get major currency account details for a one-off fee to receive overseas payments like a local
Access to BatchTransfer: Pay up to 1000 invoices in one click. Save time, money, and stress when you make 1000 payments in one click with BatchTransfer payments. Access to BatchTransfer is free with a Wise Business account
Auto-conversions: Don't like the current currency exchange rate? Set your desired rate, and Wise sends the transfer the moment the rate is met
Free invoicing tool: Generate and send professional invoices
No minimum balance requirements or monthly fees: US-based businesses can open an account for free. Learn more about fees here

Use Wise Business >>

*Please see terms of use and product availability for your region or visit Wise fees and pricing for the most up to date pricing and fee information.

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.