Being paid in USD
Discussion
I'm hoping someone will be able to shed abit of light on this for me.
We have a small family run business based in the U.K but we supply to companies in Europe, Asia and the United States. Payment is never usually an issue as we are always paid in Pound Sterling however yesterday we received a phonecall from a big customer in the United States stating that they now wish to pay us in USD at a fixed rate of $1.40 to the £.
Now this has caused me a little concern for two reasons. Firstly, I have no idea how best to receive payment in USD. I have heard that we can be charged by the bank for receiving payment in USD so would it be easier to open a different bank account especially to receive payment from them?
Secondly, I'm not sure I like the idea of a fixed rate of $1.40 to the £ because this is the worst rate we have had in roughly 25 years and if our £ was to gain strength that would mean we would be out of pocket.
As I say, any advice is welcome.
We have a small family run business based in the U.K but we supply to companies in Europe, Asia and the United States. Payment is never usually an issue as we are always paid in Pound Sterling however yesterday we received a phonecall from a big customer in the United States stating that they now wish to pay us in USD at a fixed rate of $1.40 to the £.
Now this has caused me a little concern for two reasons. Firstly, I have no idea how best to receive payment in USD. I have heard that we can be charged by the bank for receiving payment in USD so would it be easier to open a different bank account especially to receive payment from them?
Secondly, I'm not sure I like the idea of a fixed rate of $1.40 to the £ because this is the worst rate we have had in roughly 25 years and if our £ was to gain strength that would mean we would be out of pocket.
As I say, any advice is welcome.
Most big banks can open you a USD account for business. we have a a USD and Euro account for ours.
I would honestly take 1.40 right now, current trading is what 1.34? and lost 3 percent in a day, given the general fear gripping the markets that the level of debt could potentially see the UK credit rating downgrade due to risk of default its easier to see a potential collapse of sterling than a rally. Most USD futures are showing strong downward pressure as investors take flight into USD reserve currency and dump UK treasury bills.
What your client is asking is quite reasonable, they want to create a trading plan and "hedge" their currency exposure with you, they are offering you what is probably a fair risk both ways, i.e if the pound slides to 1.20 they will benefit, but if the pound rallys to 1.60 they will benefit. since all indications are of downward pressure then the odds are in your favour, but in general its designed to give a fixed cost exchange for both sides and most big businesses use a fixed forex rate for hedging their exposure, for instance our products are all priced globally in the market in USD and we pay our license fees and principal costs in USD also, and these are always fixed rather than floating against our customers local customers.
if you do a significant forex trade you should definately open a forex reserve account and make an agreement with your bank to change larger chunks of forex at an agreed rate which you can compare with a 3rd party forex dealer for value.
I would honestly take 1.40 right now, current trading is what 1.34? and lost 3 percent in a day, given the general fear gripping the markets that the level of debt could potentially see the UK credit rating downgrade due to risk of default its easier to see a potential collapse of sterling than a rally. Most USD futures are showing strong downward pressure as investors take flight into USD reserve currency and dump UK treasury bills.
What your client is asking is quite reasonable, they want to create a trading plan and "hedge" their currency exposure with you, they are offering you what is probably a fair risk both ways, i.e if the pound slides to 1.20 they will benefit, but if the pound rallys to 1.60 they will benefit. since all indications are of downward pressure then the odds are in your favour, but in general its designed to give a fixed cost exchange for both sides and most big businesses use a fixed forex rate for hedging their exposure, for instance our products are all priced globally in the market in USD and we pay our license fees and principal costs in USD also, and these are always fixed rather than floating against our customers local customers.
if you do a significant forex trade you should definately open a forex reserve account and make an agreement with your bank to change larger chunks of forex at an agreed rate which you can compare with a 3rd party forex dealer for value.
Robatr0n said:
I'm hoping someone will be able to shed abit of light on this for me.
We have a small family run business based in the U.K but we supply to companies in Europe, Asia and the United States. Payment is never usually an issue as we are always paid in Pound Sterling however yesterday we received a phonecall from a big customer in the United States stating that they now wish to pay us in USD at a fixed rate of $1.40 to the £.
Now this has caused me a little concern for two reasons. Firstly, I have no idea how best to receive payment in USD. I have heard that we can be charged by the bank for receiving payment in USD so would it be easier to open a different bank account especially to receive payment from them?
Secondly, I'm not sure I like the idea of a fixed rate of $1.40 to the £ because this is the worst rate we have had in roughly 25 years and if our £ was to gain strength that would mean we would be out of pocket.
As I say, any advice is welcome.
Tell them to fWe have a small family run business based in the U.K but we supply to companies in Europe, Asia and the United States. Payment is never usually an issue as we are always paid in Pound Sterling however yesterday we received a phonecall from a big customer in the United States stating that they now wish to pay us in USD at a fixed rate of $1.40 to the £.
Now this has caused me a little concern for two reasons. Firstly, I have no idea how best to receive payment in USD. I have heard that we can be charged by the bank for receiving payment in USD so would it be easier to open a different bank account especially to receive payment from them?
Secondly, I'm not sure I like the idea of a fixed rate of $1.40 to the £ because this is the worst rate we have had in roughly 25 years and if our £ was to gain strength that would mean we would be out of pocket.
As I say, any advice is welcome.
k off.Don said:
Tell them you'll agree a price in USD and take the risk on the currency yourself. But they're bonkers if they think they're getting the same price as the one you are prepared to offer in sterling - with THEM taking the risk.
Either that or agree the hedge for only a fixed period (6 months? 12 months?) with a reversion to sterling after that time unless another fixed amount is agreed. Receiving USD doesn’t cost anything in my Barclays business account. As someone else mentioned on the thread, the bank just convert it over at the current exchange rate.
1.40 sounds good at the moment as trading is around 1.37 but if it does go back up above 1.40 you are losing straight away. If they are a big customer you don’t want to loose them, but don’t be bullied into a currency deal which could see you loose out in the long run. If you are losing then their business is worthless to you anyway. Maybe set a review on it monthly?
As the media published on Friday we are now "officially" in recession which made the GBP even weaker but amongst all the anguish just remember at the back of your mind the GBP WILL go back up at some point.
1.40 sounds good at the moment as trading is around 1.37 but if it does go back up above 1.40 you are losing straight away. If they are a big customer you don’t want to loose them, but don’t be bullied into a currency deal which could see you loose out in the long run. If you are losing then their business is worthless to you anyway. Maybe set a review on it monthly?
As the media published on Friday we are now "officially" in recession which made the GBP even weaker but amongst all the anguish just remember at the back of your mind the GBP WILL go back up at some point.
Depending upon the volume of business that you will be doing in USD, you can adopt various hedging strategies of your own in order to cushion any potential downside risk. They will not remove the risk, but, like an insurance contract, they can provide you with more certainty in return for a little investment.
What does this mean in practice? Well, even in the current climate, you can always "design your own hedge" if you like, but it doesn't sound like it would be all that necessary here. So instead you could consider using either options or forward contracts.
An option is simple. In return for a fee, you buy the right to exchange dollars to pounds (say) at a pre-determined exchange rate.
Say, for instance, your sterling price is £100 and the dollar price is therefore $140. If the pound strengthens to $1.60 then you'll only receive £87.50. So if you can find somebody willing to sell you an option to convert dollars to pounds at $1.40 then you could choose to exercise that option if you need it. If you don't exercise it, the option lapses - you've only lost the premium you paid for the option.
If you're going to play that game (and, arguably, in any case), it is well worth opening a separate USD bank account. That way you can choose the timing of the exchange. That's important, since most options will expire after a fixed date in the future. If the pound is gaining, you accumulate dollars until the required date, then convert the lot (i.e. exercise the option).
Obviously the premium you pay for the option will be determined by market sentiment. It is a trade-off, whereby you essentially have to bet in anticipation how many times you'll need to exercise the option and when, and then decide how much this protection is worth to you.
If you do go down this route, don't forget that the option is only as valid as the party selling it (the "counterparty"). If they go bust, your option is worthless. Managing counterparty risk is a large game on its own and, as witnessed by the Lehman situation, isn't always simple! So you need to pick your counterparty with care.
A forward contract, in contrast to an option, locks-in the exchange rate at a date in the future - you can't simply decide not to exercise it if you don't want to, so you take the risk. Essentially your customer is asking you for a forward exchange rate contract. If he was to try to get such a deal on the open market, he would have to pay a premium for this. So consider offering him a similar deal - have fixed exchange rates for 12 months in return for a small percentage price bump. You can then use that "premium" to buy an option or two!
But that might be all too sophisticated if the numbers you're talking about are small! You might prefer just to work out what your margins are on this business, decide how far you're prepared for your margin to fall to keep the customer (i.e. how far the currency can move against you), and try to negotiate a limit into the contract (prices fixed unless $ reaches 1.60 to the £, for instance).
One last thought - can you start buying some raw materials, or even services (web hosting, say) in US$? If so, you've created what's called a "natural hedge" against the fluctuation.
What does this mean in practice? Well, even in the current climate, you can always "design your own hedge" if you like, but it doesn't sound like it would be all that necessary here. So instead you could consider using either options or forward contracts.
An option is simple. In return for a fee, you buy the right to exchange dollars to pounds (say) at a pre-determined exchange rate.
Say, for instance, your sterling price is £100 and the dollar price is therefore $140. If the pound strengthens to $1.60 then you'll only receive £87.50. So if you can find somebody willing to sell you an option to convert dollars to pounds at $1.40 then you could choose to exercise that option if you need it. If you don't exercise it, the option lapses - you've only lost the premium you paid for the option.
If you're going to play that game (and, arguably, in any case), it is well worth opening a separate USD bank account. That way you can choose the timing of the exchange. That's important, since most options will expire after a fixed date in the future. If the pound is gaining, you accumulate dollars until the required date, then convert the lot (i.e. exercise the option).
Obviously the premium you pay for the option will be determined by market sentiment. It is a trade-off, whereby you essentially have to bet in anticipation how many times you'll need to exercise the option and when, and then decide how much this protection is worth to you.
If you do go down this route, don't forget that the option is only as valid as the party selling it (the "counterparty"). If they go bust, your option is worthless. Managing counterparty risk is a large game on its own and, as witnessed by the Lehman situation, isn't always simple! So you need to pick your counterparty with care.
A forward contract, in contrast to an option, locks-in the exchange rate at a date in the future - you can't simply decide not to exercise it if you don't want to, so you take the risk. Essentially your customer is asking you for a forward exchange rate contract. If he was to try to get such a deal on the open market, he would have to pay a premium for this. So consider offering him a similar deal - have fixed exchange rates for 12 months in return for a small percentage price bump. You can then use that "premium" to buy an option or two!
But that might be all too sophisticated if the numbers you're talking about are small! You might prefer just to work out what your margins are on this business, decide how far you're prepared for your margin to fall to keep the customer (i.e. how far the currency can move against you), and try to negotiate a limit into the contract (prices fixed unless $ reaches 1.60 to the £, for instance).
One last thought - can you start buying some raw materials, or even services (web hosting, say) in US$? If so, you've created what's called a "natural hedge" against the fluctuation.
Thanks for everyones contributions, I really appreciate it.
What I'll do is run the options by everyone else and see what they say.
In regards to buying material in USD, unfortunately that is not an option. The company we buy the raw materials from are a multi national company but have seperate plants for producing the raw materials in Asia, America and Europe. If we were to purchase the goods from the states we would incur transport costs, import tariffs/quotas and we would have to wait 6-8 weeks for the materials to arrive.
We have looked for different suppliers but some don't meet RoHS, UL or CA standards.
Thanks again.
What I'll do is run the options by everyone else and see what they say.
In regards to buying material in USD, unfortunately that is not an option. The company we buy the raw materials from are a multi national company but have seperate plants for producing the raw materials in Asia, America and Europe. If we were to purchase the goods from the states we would incur transport costs, import tariffs/quotas and we would have to wait 6-8 weeks for the materials to arrive.
We have looked for different suppliers but some don't meet RoHS, UL or CA standards.
Thanks again.
Robatr0n said:
Thanks for everyones contributions, I really appreciate it.
What I'll do is run the options by everyone else and see what they say.
In regards to buying material in USD, unfortunately that is not an option. The company we buy the raw materials from are a multi national company but have seperate plants for producing the raw materials in Asia, America and Europe. If we were to purchase the goods from the states we would incur transport costs, import tariffs/quotas and we would have to wait 6-8 weeks for the materials to arrive.
We have looked for different suppliers but some don't meet RoHS, UL or CA standards.
Thanks again.
Re raw materials, I was talking about sourcing materials priced in USD, not necessarily sourcing them from the USA What I'll do is run the options by everyone else and see what they say.
In regards to buying material in USD, unfortunately that is not an option. The company we buy the raw materials from are a multi national company but have seperate plants for producing the raw materials in Asia, America and Europe. If we were to purchase the goods from the states we would incur transport costs, import tariffs/quotas and we would have to wait 6-8 weeks for the materials to arrive.
We have looked for different suppliers but some don't meet RoHS, UL or CA standards.
Thanks again.
Canada, for instance, or other parts of the world that deal in USD. Many might even prefer USD contracts if you ask You'll also note I suggested other things as a dollar hedge as well. For instance, if you have a website, could you host that on a US server and pay USD fees? Are there any other services you could buy in USD? It doesn't have to be raw materials.
One last thing, even if you do nothing else: do look seriously at the idea of, at least, a USD account, assuming it doesn't cost you too much, just so that you can at least decide when to convert from USD to GBP
Good luck with it all!
its all changing so quickly, approx 14 days ago I wanted to change 300,000 USD to Sterling I got the banks rate at 10 am and it was 1.46, i decided to move at 2 pm and it was then 1.488 so in the space of a few hours I was £ 4000 down, I decided to hold and next day was 1.5 and kept going up to from memory about 1.58 ( at least with HSBC ) then last week it was 1.35, for the record I moved at 1.37 and the decission to hold on the first day when I was £ 4000 worse off made me about 12 K more profit, strange thing to those not used to dealing in such markets.
Robatr0n said:
Secondly, I'm not sure I like the idea of a fixed rate of $1.40 to the £ because this is the worst rate we have had in roughly 25 years and if our £ was to gain strength that would mean we would be out of pocket
Hang on. You (and a few other posters in this thread) have got it all wrong. This is a stunning deal. If Sterling strengthens (as I believe it will) you MAKE loads of money.Look at an example. Let's say the Pound strengthens back to $2.00 to the Pound and you receive $10,000
Under this deal that means you get 10,000/1.4 = £7,143
Without this deal you get 10,000/2.00 = £5,000
You're being invited to lock in a rate at its (almost) historical best ever level. If your opinion is that the Pound will strengthen then you should be TAKING this deal. This is a great piece of business (or have I misunderstood something??)
my advice is to open a dollar account for your business. if you cash in usd cheques into a gbp account, your essentially in the dark about how much your gonna get back as the rate conversion is done on the basis of the sell rate the bank offers to customers at the time the cheque is processed or the transfer is made (which isnt easily controlled). they don't usually charge fees for cashing foreign currency but at the same time retail banks dont offer customers very good rates (as I have found in the past when I used to due a lot of L/C payments for imports)- so they make their money by giving you a weaker rate.
the best rates your going to get are mostly likely from dedicated fx brokers like Travelex payments (corporate - not the airport exchange tills!), world first, hifx and the like. Depending on volumes of trading your going to do you can negotiate rates that are reasonably close to the market rates (theres always going to be a bit of margin for the broker's to make some money). You can then control when exactly and at what rate your converting your money and your not just limited to making spot trades (i.e. instant/current rate conversions) but you'l have access to hedging tools such as forwards and options.
the best rates your going to get are mostly likely from dedicated fx brokers like Travelex payments (corporate - not the airport exchange tills!), world first, hifx and the like. Depending on volumes of trading your going to do you can negotiate rates that are reasonably close to the market rates (theres always going to be a bit of margin for the broker's to make some money). You can then control when exactly and at what rate your converting your money and your not just limited to making spot trades (i.e. instant/current rate conversions) but you'l have access to hedging tools such as forwards and options.
Just to update you all:
Not alot has happened with this and our negotiations are currently on hold as it is now highly possible that they will be able to pay us in Sterling which obviously makes being paid in USD a non issue.
Thank you for everyones comments and concerns, they have all been taken on board.
I shall keep you all informed when negotiations re-open.
Thanks again!
Not alot has happened with this and our negotiations are currently on hold as it is now highly possible that they will be able to pay us in Sterling which obviously makes being paid in USD a non issue.
Thank you for everyones comments and concerns, they have all been taken on board.
I shall keep you all informed when negotiations re-open.
Thanks again!
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