Currency fluctuations effecting the Used Equipment Trade
As many of you have probably noticed currency fluctuations have a big effect on our Machinery business. If you are buying or selling overseas alot of the time a different currency comes into play. If that is the case you run some risk because the exchange rate changes constantly. A buyer in the USA for instance buying a machine in Europe will always calculate his buy in US Dollars and can adjust its offer accordingly if it changes negatively. On the other side i fit changes positevly a deal that was impossible yesterday can come together today all of a sudden.
Today I would like to sell a machine to an American customer. I need a minimum of 100.000,- EUR. for the machine. Toadays exchange rate is 1.125 which means it will cost the customer 112.500 USD to buy the machine but he only wants to pay 110.000 USD. We cannot make the deal unfortunately. A couple of days later however the USD went up against the Euro and the rate is now 1.10 .That means the customer can now buy the machine for 110.000 USD and I will get the needed 100.000 Euro.
If you buy a machine in a country with a different currency you can do 2 things.
- Ask the buyer to invoice you in your own currency , he will then take the risk and you know exactly what you pay. Many sellers however will or cannot do this.
- Pay in the sellers curency. In that case you have to exchange your currency to pay the seller in his currency. You can do this at your bank but many times its cheaper to use a special currency company. Especially if your company is not set up for this and the bank will charge you a large commission.
For selling the situation is the same as buying, you can do 2 things.
- You can sell in your own currency and then all the risk is for the seller. In many cases though the buyer doent want or will not be able to pay in your currency.
- In those cases you may want to sell in their local currency. If you do that you need cover your risk. You need to know what the cost of this are going to be and what your potential risk is. For instance if you cover your risk and the customer doenst pay you might lose money on the currency deal alone. For this reason many sellers wont sell in another currency. We for instance accept payment in Euros, our local currency and USD. Because we always deal with USD. but we dont accept other currencies for payment.
How to cover you risk
There are several ways to cover your exchange risk if you are planning a foreign exchange transaction.
- Pay from your local currency account. You probbly dont need anything extra but he charges are usually very high. I woud not recommend this
- Open up a foreign currency account. On this account you can buy or sell the foreign currency and pay/receive from there. This a good option as you can still control all the costs, but be aware of the fees your bank charges for this. You need to calculate that in your deal. Also the bank puts you in a certain bracket which will determine the percentage they charge for the transaction. It can make quite a difference if you need to pay 0,6% or 0.2% commission. The brackets are mostly determined by volume. It is worth it to ask your bank to be put in higher bracket as in my experience they mostly dont do it if you dont ask.
If I want to sell USD. 100.000,- and buy Euro at an exchange rate of 1.10 I will get get the following amounts.
100.000 : 1.102 = 90.744
100.000 : 1.106 = 90.416
Thats a difference of 328 Euro
- You can also open up an account at a foreign exchange company like Ebury. Ther you will get your own foriegn currency acoount where you can pay and receive foreign currencies. The rates they give are usually better than at your bank but you need to set everything up with them which in my experience can be quite a hassle. I used their rates to negotiate a better ratebracket with my local bank and now are quite close to these rates.
- Another way to cover your risk is to hedge foriegn currency. If you deal alot with a certain currency and you expect (big) fluctuations in the future you can hedge the cuurency by buying future contracts. Here is how that works. You have deal with someone that wants to buy a machine but you will only be able to deliver the machine in 3 months. You can now either sell the currency now and have a debit stance on your account untill the money comes in or you can sell in the future. If you put in the future transaction you will usually pay a (smal) fee/percentage called a dissagio because the risk has to be covered.
With the fluctuations in the exchange rates there are always opportunities in the air. Aside from the normal flucuations due to economy, interest rates and solvency of a country sometimes other situations arise suddenly. Countries can devaluate their currency or have a Total collapse of the exchange rate. At these times it can be a good time to buy machines in such a country. The devaluation of the Turkish Lira and the collapse of the Brazilean Reaal can been seen as examples where all of a sudden the machines getting really cheap and lots of people started buying there. Be aware of what youre doing though because not everyone there can be trusted.
I will give a quarterly update on the 6 most important currencies and keep a look out for crazy developments in other less known exchange rates.