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  • Heads of WTO and development banks voice support for trade finance amid COVID-19 crisis July 1, 2020
    The heads of the WTO and six multilateral development banks on 1 July issued a joint statement promising to address shortages in trade finance, so that financial market stresses arising from the COVID-19 crisis do not prevent otherwise-viable trade transactions, including for essential goods such as food, drugs and medical equipment. They committed to do […]
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  • Panels established to review Indian tech tariffs, Colombian duties on fries June 29, 2020
    WTO members agreed at a meeting of the Dispute Settlement Body (DSB) on 29 June to a request from the European Union for a dispute panel to examine India’s tariffs on certain high-tech goods. The DSB also agreed to an EU request for a panel to review Colombia’s anti-dumping duties on frozen fries from Belgium, […]
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  • WTO report on G20 shows moves to facilitate imports even as trade restrictions remain widespread June 29, 2020
    While import-restrictive measures introduced by Group of 20 (G20) economies continue to cover a growing share of trade, the WTO’s latest biannual monitoring report on trade measures — the first to cover a time period coinciding with the coronavirus pandemic — points to significant moves to facilitate imports, including products related to COVID-19. During the […]
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  • DDG Wolff: WTO acceding governments reconfirm value of multilateral trading system June 29, 2020
    At a time when the WTO is under heightened scrutiny and reform of the WTO is a subject of concern for all, the efforts undertaken by acceding governments to join the organization are a force for change, Deputy Director-General Alan Wolff said on 29 June. Speaking at the virtual opening session of the WTO’s Accessions […]
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Foreign Currency Advance



 

Foreign Currency advance is n hedging technique, which enables Exporters to avoid the risks resulting from a deferred payment denominated in a foreign currency. This service is usually provided by a commercial Bank, which will borrow the needed foreign currency for his client.

Let’s take the example of a French exporter and a US Importer who concluded a 10 000 000 USD deal with a 90-day payment term. In order to neutralize his currency risk exposure, the exporter will apply for a foreign currency advance. The commercial bank will then borrow this amount and lend it to the exporter, which will have to repay in USD at a given date (this should in line with payment maturity agreed in the export sales contract) + interest denominated in USD.

Once the funds are available in the French Exporter’s bank account, he will immediately change the USD against EUR and by then avoid his exposure to the foreign currency.

In this case the exporter will honour his obligations by using the payment received by the US Importer 90 days later.

As we can see this method enables to avoid most of the currency risks linked to his sales contract although the exporter remains exposed to the currency risks resulting from the interest charged by his bank that must be repaid in the foreign currency (Which is marginal compared to the whole operation).

Note that this method could be used as both, a financing tool as well as a currency-hedging tool.

Please click on the links below for more hedging techniques