Factoring Companies Guidebook

Where a Client covers its risk to adverse foreign exchange rate movements by buying and selling the currency at an agreed rate on a fixed date, or between two dates in the future. Forward Exchange Contracts may be either Fixed Contracts or Option Contracts.

Fixed Contracts

Exchange risk can be avoided by 'selling forward' foreign currency to a bank under a fixed contract. The exporter arranges to pay or deliver to the bank the foreign currency on a specific day when it is received from the customer. In exchange the bank guarantees to pay a fixed sterling sum for the currency on that date. Some Clients may sell forward their foreign currency prepayments.

Purchasing Forward

An exchange rate risk also exists for a purchaser who has to pay for goods in a foreign currency at some future date. In this case the required currency can be purchased forward.

Extending the Contract Date

If a currency receipt is delayed beyond the final date of the fixed contract, the contract can usually be extended. At the end of the extended time the bank will debit or credit the exporter for the exchange difference, depending on whether sterling has strengthened or weakened against the currency concerned.

Options Contracts

These contracts are similar to fixed contracts but they allow the transaction to take place at any time between certain dates e.g. between 1 st June - 30th June, instead of on a specific date.

See also: - "Currency Invoices"

Concerns

As soon as an exporter accepts an order and agrees to be paid in foreign currency it has a foreign currency risk. Exchange rates fluctuate and by the time foreign currency are received and sold in sterling, values may have changed with less sterling being received that was expected. The seller and therefore we can never be sure how much will be realised from the debt.

Identification

The following enquiries should be made:

Does the Client raise invoices in different currencies?

Are currency invoices converted into Sterling when posted to the ledger?

Does the Client ever receive payments from customers in a currency other than that of the invoice?

Does the Client cover its foreign exchange risk through forward contracts?

Treatment

Where there is a risk of material losses due to exchange rate fluctuations, which are not adequately covered through Forward Contracts, a reserve may be created or PPF reduced to maintain our security.