Exchange rate insurance could be a good way to neutralize potential risks resulting from adverse foreign currency fluctuations. Indeed, specialised insurance companies provide this kind of service to companies involved in International trade transactions.
This type of insurance could take the following forms:
Import-Export Exchange rate insurance.
When an Importer or an Exporter must receive or honour a payment in a foreign currency, they can benefit from Import-Export Exchange rate insurance. In this case the policyholder will secure a fixed exchange rate. A premium will be charged based on the currency covered and the length of the period considered.
Tender Exchange rate Insurance
During a Tendering process, an Exporter needs to have a fixed exchange rate in order to bid in the best conditions. Indeed, adverse currency fluctuations are likely to occur between the time when the bidding is assessed and the tender is awarded. This is where the tender Exchange rate insurance comes in as good way to cover this kind of risks. Indeed in this case the exchange rate is guaranteed during the whole period and as a result the Bidder can avoid uncertainties that might compromise the profitability of the project.
In this case, the insurance will charge a premium to the Importer or the Exporter, who in turn will benefit from a fixed exchange rate. As result, the policyholder prevent any currency risk which might impact his profit margin / procurement costs. However in this case it will not be possible to take advantage of favourable exchange rate evolution.
Fixed rate with shared profits.
Here the exchange rate is still guaranteed, but the potential gains resulting from favourable currency fluctuations are shared between the underwriter and the policyholder. The proportion in which profits are shared could vary from 70%/20% to 50%/ 50%.
However in both cases the risk is 100% covered