Food and Beverage importers who agree to purchase shipments of goods in the future may be putting themselves at risk of profit loss, depending on how foreign exchange rates fluctuate over time.
A U.S. wine importer, who sells to domestic retailers at a set price, may place an order to purchase a shipment from a European exporter in six months.
What happens if the Euro strengthens or weakens in that time?
Although the potential for profit increase sounds appealing, the reality is that there is no way to know for certain that the euro will weaken between the time the importer orders their shipment and when the purchase is finalized and paid for.
FOREIGN EXCHANGE HEDGING
The cost of the wine could be predetermined, regardless of future currency swings, if the wine importer entered into a forward contract to lock in the exchange rate in six months. The forward contract provides the business protection from potential revenue loss, or in other words a hedge against the risk of fluctuations in currency exchange rates.
For more information about foreign exchange hedging, feel free to connect with a PNC FX specialist.
You may also register for the PNC webinar, “Examining the Hidden Risks of FX Volatility,” on Tuesday, June 22, at 2pm EST. Please register here.
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