1. Timing flexibility

2. Volume flexibility

3. No hedge accounting

4. No bank fees

 

Average value of a Canadian Dollar: 

 

 

2002  =  US$0.64

 

2007  =  US$1.00

For instance:

They manufacture and export  boots   …   from Canada to the U.S.

 

You import and sell those boots   …   in the U.S.

 

Currency exchange rate movements are a risk to your combined business.

 

They can live with 50% of the currency risk, if you can live with 50%. 

 

THIS SIMPLE CONCEPT CUTS ACROSS ANY CURRENCY PAIR, 

 

and

 

APPLIES TO A WIDE VARIETY OF INTERNATIONAL BUSINESS RELATIONSHIPS.

The simple case of the split-currency invoice:

 

50% of the price stated in the seller’s currency

 

and

 

50% of the price stated in the buyer’s currency.

 

Agree a split-currency PRICE per unit:

 

US$1.00 + C$1.00

 

“two dollars per unit”

 

 

         

PRICE                        Cost to a U.S. Buyer of  Canadian Product

C$2                            US$1.60       US$2.00       US$2.50

(not shared)

C$1+US$1                US$1.80       US$2.00       US$2.25

(shared)

 

Rate (US$ per C$):           0.80              1.00              1.25

Currency Risk Sharing reduces Purchase Cost volatility by half.

PRICE                         Cost to a Canadian Buyer of  U.S. Product

 

US$2                          C$2.50       C$2.00       C$1.60

(not shared)

 

 

US$1+C$1                C$2.25       C$2.00       C$1.80

(shared)

 

Rate (C$ per US$):        1.25            1.00            0.80

Currency Risk Sharing reduces Purchase Cost volatility by half.

Mutual trust, alignment of effort, manageable risk.

 

The direction of favorability of exchange rate movements comes into alignment for both Seller  and Buyer.  This alignment "puts you on the same team" rather than at cross purposes.

 

Consider:

 

Seller (a producer in a first country) and Buyer (a marketer in a second) each carry only 50% of the currency risk. 

 

Each receives 50% of the benefit from favorable rate movements.

Each manages 50% of the effect of unfavorable rate movements.

 

Currency risk sharing motivates a shared response to a shared business risk (currency exchange rate volatility). Joint effort in response to currency risk reinforces mutual trust and helps to preserve and grow business volumes.

To design an appropriate Currency Risk Sharing agreement,

Seller and Buyer will need a team.

 

The team evaluates the particular set of circumstances and

drafts the agreement accordingly.

 

The split-currency invoice is a simple example, but the optimal form of currency risk sharing will depend on individual circumstances.

Implementation team:

•International Supply Chain Executive from Buyer

•International Sales Representative of Seller 

•Financial staff participation from both buyer and seller

•Legal staff participation from both buyer and seller

•Information management staff participation from both buyer and seller.

•External expert on currency risk sharing agreements

 

•   CurrencyRiskSharing.com, Principal

•   Twenty years of corporate currency risk management experience.

•   Former Deputy Treasurer, Xerox Europe.

•   Corporate career: 

Xerox Corporation,

Ford Motor Company,

The Iran American Chamber of Commerce,

AIESEC-U.S., Inc.

MBA – International Finance, University of Wisconsin