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How Interest Rates Affect Foreign ExchangeKnow how much you'll pay for goods in another country, even if the dollar's value decreases.Fotis and Son Imports Inc., of Huntington Beach, Calif., imports, distributes and manufactures Greek food products in the western United States. It takes about eight to 10 weeks for the importer to receive goods from suppliers in Greece, Turkey and Spain. If Fotis and Son had to pay for products based on the ever-fluctuating foreign exchange rates, it would be difficult to plan its operating budget, says Peter Georgatsos, vice president. That's why Georgatsos relies on Wells Fargo Foreign Exchange. He is able to lock in a price for future shipped goods based on the current value of the U.S. dollar. "We decided to use this service when we saw the dollar start losing ground," Georgatsos says. "Most of the vendors in Europe were going to the euro. We started seeing that happen in the last two years. Prior to that, they loved the dollar!" Profit Protection "Hedging," which allows you to set foreign exchange rates in advance for payables or receivables, is a prudent business practice, says Jerry Razee, foreign exchange specialist and team leader for Wells Fargo's Foreign Exchange office in Los Angeles. It protects your profits from sudden fluctuations in foreign exchange rates. "Interest rates of other countries are the primary determinant of the rate of exchange," Razee says. "So if a country raises its interest rates, that country's cost of currency will probably go up and it will cost you more to do business in that country." Many factors affect currency fluctuations, Razee adds. These include a country's deficit, unemployment, political stability or even natural disasters, such as the recent tsunami. Your financial institution's advisors can keep you apprised of short-term devaluations in foreign currency, he says. Additionally, it pays to watch key indicators for what the Federal Reserve (the Fed) might do with domestic interest rates, Razee says. "It could impact the dollar. Some people have to decide whether to make (an overseas) purchase before or after the Fed meets," he says. The Right Way to Pay With a foreign exchange service, you make payments to foreign vendors via wire transfer or international bank draft. With this service, you also can lock in today's rate of exchange for a future maturity using a "forward contract." "You choose the maturity date, typically anywhere from three days to one year (you can't use it until that time), and you get today's rate of exchange applied to it," Razee explains. You even can use your line of credit to help pay the contract. "Before you book your forward contract, your primary banker can put a freeze on a portion of the line," Razee says. "It's not a hard charge, rather your banker puts a reserve on the funds, so that portion can't be used for other purposes." Georgatsos says the revolving credit line helps him get products when he needs them. His vendors give him 60 days to pay them. It takes about 40 days for the order to arrive, leaving him 20 days. If Georgatsos gives his customers 30 days to pay invoices, he must rely on the credit line to bridge the gap. The fixed rate of exchange in the forward contract helps him plan his budget with certainty. It wouldn't make sense to wait for the right interest rate before ordering overseas products, Georgatsos says. "You would potentially have lost sales, because your product would be sitting on a vessel while you were playing an interest rate game. It doesn't make sense to do it that way," he says. Source: Wells Fargo Discuss it on SBE Forum >> |
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