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I have few misunderstand can you please tell whether it is correct or not 🙂
1) Is it true that when our Local Currency depreciates (Foreign Currency appreciates) then in case of payment we have to pay more of Local Currency NOW.
But in case of receivable we have to receive less of Local Currency NOW.
2) Exporter (when we sell goods to Foreign customer):
If Local Currency depreciates we will receive less
If Local Currency appreciates we will receive more
3) Importer (when we buy goods from Foreign supplier):
If Local Currency depreciates we will pay more
If Local Currency appreciates we will pay less
4) Is it also true that when Exporting or Importing the invoice bill will be made in Local Currency but in can be in Foreign Currency depending upon in which Currency Invoice bill is made?
I appreciate your time! Hope you are well 🙂
1. Yes (assuming that the payment has to be made in the foreign currency).
2. If the exporter invoices in the local currency (which is the most likely) then changes in the exchange rate are not relevant because they will be receiving their local currency.
If they are invoicing in the foreign currency (and will therefore be receiving foreign currency) then when we convert the receipt we will receive less local currency if the local currency has depreciated and will receive more local currency if the local currency has appreciated.3. Yes (as in (1)
4. Companies will usually invoice in their own currency, even when exporting. However if the customer insists on being invoiced in their currency (i.e. the foreign currency) then they might agree to do that, especially if it is a big customer and they might otherwise lose the sale.
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Doubt regarding point (2):
I don’t understand that if we invoice in Local Currency then why are we not affected by the changes in the exchange rate.
Is it correct that anybody paying or receiving money in the Foreign Currency is the one who is gonna get affected by the Foreign exchange rate risk because they have to convert the money at the current spot rate in case if they are paying us in our Local Currency?
In case of receivables, they get affected because they will be paid by us in Local Currency for which the foreign customer (when received money) has to convert at the current spot rate to get equivalent Home Currency (i.e. Foreign Currency from our view).
So any change in Foreign exchange will affect the party who has either to pay or receive money in Foreign Currency.
Thanks for your time 🙂
What you have written is correct.
Therefore if the exporter invoices in their own currency the customer has not pay in that currency. So it is the customer who has the risk, not the exporter.
The exporter only has risk if they invoice in the customers currency because then the customer pays in the foreign currency and the exporter has then to convert the receipt.
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