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Regardless of the industry your business operates in, if you deal with international payments, you must have encountered forex volatility. At one point, the exchange rate might appear beneficial, but in the next moment, it changes out of nowhere, increasing the costs. For Indian companies who have to make payments in USD, EUR, or any other foreign currency, even a slight dip in INR can drastically affect the profits made. Making it a good idea to lock in forex rates at the right time.
By locking a forex rate in advance, businesses can hedge against volatile changes, which enables them to ensure that predetermined payments do not change, no matter how fluctuating the exchange rate is.
In this guide, we will analyze how Indian businesses can lock forex rates, what techniques can be used, and how Karbon makes it easy.
A guaranteed forex rate is the locking of an exchange rate for a future date, protecting the business from currency fluctuations. This means that regardless of how the forex market moves, the agreed rate remains fixed, ensuring cost stability for international transactions.
Why It Matters
Exchange rates can be very unpredictable, and tiny changes can become an additional cost for the business. A fixed forex rate, therefore, gives businesses the option to:
Businesses use guaranteed rates of forex under various circumstances. Some of those circumstances include:
Payment to International Suppliers: Importers and service-oriented companies use fixed rates of forex for the payment of overseas suppliers.
Processing Payroll Overseas: Companies having employees or freelancers working in other countries can lock exchange rates for salary payouts.
Export Transactions: Exporters use locked rates for predictable revenue and importers do so for the management of procurement costs.
Loan Repayment in Foreign Currencies: Companies that are repaying foreign currency loans can hedge against unfavorable rate movements.
Example:
An Indian company has to pay a European supplier €100,000 in 45 days. If the present-day rate for EUR/INR is ₹90 but at the time of payment INR has weakened to ₹93, then it will pay ₹3,00,000 more. Locking the present rate means that there would be no such risk, and the cost incurred would be as predictable.
Businesses can trade with assurance using guaranteed forex rates, securing their profits against the volatility of the currency market.
Companies can lock in forex rates by using various financial instruments, based on their payment timelines and risk appetite. The most common methods are as follows:
1. Forward Contracts
A forward contract is an agreement with a forex provider to lock in an exchange rate for a future transaction. This helps protect businesses from currency fluctuations as they pay a fixed rate irrespective of market movements.
Advantages:
Disadvantages:
Example: An Indian exporter is selling goods to the US. The exporter expects $100,000 in 60 days. Assuming the current rate of USD/INR is ₹83 but INR is likely to appreciate to ₹81, the exporter can lock the rate at ₹83/USD today. Thus, the exporter gets a stable revenue without facing any losses from the appreciation of the currency.
2. Forex Options
A forex option provides businesses with the right, but not the obligation, to exchange currency at a specific rate on a future date. This method is more flexible than forward contracts because businesses can opt to utilize the locked rate or the market rate at the time of the transaction.
Advantages:
Disadvantages:
Example: A software company is expecting $200,000 in revenue in 90 days and fears that INR might appreciate, reducing its converted earnings. It buys a forex option at ₹83/USD, which will ensure that it can sell at that rate while still holding the flexibility to use the market rate if INR depreciates below ₹83.
3. Spot Contracts with Rate Lock
A spot contract is an outright forex transaction, but some providers enable businesses to fix the agreed rate for a short duration, usually 24–48 hours. This will help the business to fix a rate for payments without locking into long-term forex contracts.
Advantages:
Disadvantages:
Example: A manufacturer wants to make a payment to a supplier who charges €50,000; however, this manufacturer expects that rates will fluctuate in the next 24 hours. That means they can guarantee a fixed rate for today when making the transaction.
4. Multi-Currency Accounts
A multi-currency account allows businesses to hold foreign currencies, so that they have flexibility in determining when to convert the funds, according to the prevailing favorable exchange rate. Businesses don't lock in a rate; instead, they avoid converting the forex immediately and choose the optimal time for exchange.
Advantages:
Disadvantages:
Example: An Indian IT firm gets its dollar payments, may maintain them in a multi-currency account, and convert them into Indian Rupees, whenever the INR strengthens, so profits are maximized.
It is all about understanding which method to use to lock the forex rates so that your businesses is never exposed to currency fluctuations.
Banks and forex platforms set their locked forex rates using the interbank exchange rate as a base and adding a markup or spread to cover the risk. The rate varies by provider, transaction size, and currency pair – banks typically have higher spreads than fintech platforms.
Providers mark the rate on the currency pair to protect themselves from losses when the currency’s market rate changes, that’s why they employ hedging strategies that make use of forward contracts, and the cost of the hedging is included in the rate. Levels of the commitment also influence the rate – short-term rate locks (hours/days) typically have lower charges than long-term rate locks (weeks/months).
Ultimately, locked forex rates are a mix of real-time market prices, provider fees, and risk management strategies. Businesses can get better deals by comparing multiple providers, understanding pricing structures, and locking rates strategically.
Most fintechs and traditional banks charge fees for holding on to your foreign currency payments. However, Karbon allows holding your foreign inward remittances for up to 60 days at no cost. You can withdraw the money anytime during this period. This means a completely free short-term forex rate lock.
For longer periods of rate lock, you can get custom rates by getting in touch with us. Our dedicated account managers will carefully understand your requirements and get back with an offer.
Get started and take a look at our dashboard today!
This is different with every provider. Some platforms allow locks for a few days while dedicated forex trading platforms allow it for an indefinite period.
Providers charge a small premium that is contained with the rate which aids in covering the risk taken, however, it assists in reducing a company’s currency exposure risk. Some simply add on a fee for placing the rates during the term of lock.
Yes! Even SMEs can take advantage of the foreign exchange markets as it allows them to guard against unpredictable exchange rates.
Once a rate is locked, you are committed to it. However, businesses can use flexible forex hedging strategies to mitigate potential losses in such scenarios.
Q5: Which forex providers offer the best forex rate-locking services?
There are several providers such as banks, fintech platforms, and specialists that offer both locking services and forex trading. For general business purposes, Karbon provides simplistic forex rate locking.
Short-term rate locks (hours to days) are ideal for immediate transactions, offering lower costs. Long-term locks (weeks to months) provide stability but come with higher premiums. The choice depends on your business’s risk tolerance and payment schedule.
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