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For any business that deals with international trade, foreign currency plays a big role in daily operations. Whether you’re buying machines from another country or selling goods to customers abroad, the value of money changes based on exchange rates. These changes can either add to your profits or take away from them. That’s why measuring the performance of your forex activities is important. This blog will walk you through simple ways to evaluate how well your forex operations are performing using easy-to-understand examples and tips.
Know How Much Foreign Currency Comes In and Goes Out
The first step is understanding how much foreign currency you receive and pay. This is also known as tracking your foreign currency inflows (money you receive) and outflows (money you pay).
Example: Imagine you export garments worth $100,000 every month to the US and import fabric worth €80,000 from Europe. Now, you know that your business is linked with two foreign currencies—USD and EUR. This is where your forex exposure starts.
Understand Your Trade Timelines and Payment Terms
The time between taking an order and receiving payment or making payment is known as your trade cycle. The longer the time gap, the higher the chance of currency rate changes affecting your money.
Example: Suppose you take an order on March 1, ship the goods by April 15, and receive the payment by June 15. That’s a total of 105 days from start to finish. If the exchange rate moves from 83 to 81 during this time, you lose ₹2 for every dollar. On $10,000, this means a loss of ₹20,000.
Go Beyond Your Profit & Loss Statement
Most companies look at their accounting books to measure how they performed in forex. They often use something called the Bill of Lading (B/L) method. This records the exchange rate when goods are shipped. But the real exposure begins much earlier, when you accept the order.
Here’s a basic example to help explain this:
Imagine you’re an Indian exporter.
Order Date: USD/INR = 87, Goods value = $10,000 → You expect to receive ₹870,000.
B/L Date: USD/INR = 85 → You record ₹850,000 in your books.
Payment Date: USD/INR = 86 → You receive ₹860,000.
Accounting shows a gain of ₹10,000 (860,000 - 850,000). But if you compare this to what you expected on the order date (₹870,000), you are still ₹10,000 short.
Use the First Day Forward Rate (FDFR) as Your Benchmark
When you plan to hedge your currency exposure, it helps to have a benchmark rate in mind. This is where the FDFR comes into play.
FDFR = Spot Rate (today’s rate) + Forward Premium (extra cost for booking in advance)
Example: Let’s say today’s EUR/INR rate is 97 and the forward premium is 2.15. So, FDFR = 97 + 2.15 = 99.15.
This rate becomes your reference point. You’ll decide whether to hedge based on whether the current forward rate is better or worse than this.
Hedge Only When It Makes Sense
If you’re an exporter (you will receive foreign currency in the future), then:
- Hedge only when the forward rate is above 99.15 (based on the example). This means you’re locking in more INR per euro, which is good for your revenue.
If you’re an importer (you will pay in foreign currency), then:
- Hedge only when the forward rate is below 99.15. This means you’re locking in a lower cost in INR, which is good for your expenses.
Example for Exporter: Forward rates available are 98.0, 99.5, and 100.5. You hedge at 99.5 or 100.5 because they are better than 99.15.
Example for Importer: Forward rates are 97.5, 98.0, and 99.0. You hedge at 97.5 or 98.0 because they are cheaper than 99.15.
Check If Your Hedge Helped
Once the forward contract matures, compare the rate you locked in with the actual rate on that day.
Example: You locked in 99.5 and the spot rate on the day is 98. You saved money. But if the spot was 101, you lost a chance to earn more.
Track the Right Performance Indicators
Here are some useful numbers you should track regularly:
- Percentage of your forex exposure that is hedged.
- Difference between the rate at order time and the rate at payment time.
- How much did you lose or save by hedging or not hedging?
- Costs like forward premium, bank charges, and interest.
Tracking these will give you a full view of how your forex operations are performing.
Set a Business Benchmark Rate
This is the rate that helps you meet your cost and profit goals. Use this rate to decide whether to hedge or not.
Why This Approach Works
By following this method, you stop reacting to the market blindly. Instead, you follow a plan that protects your business. You make decisions based on facts and figures, not on fear or hope.
You also avoid unnecessary costs and keep your profits safe from sudden currency swings.
Final Thoughts
Measuring the performance of your forex operations is not about chasing gains or reacting to every small change in currency rates. It’s about setting benchmarks, tracking real exposure, and making informed decisions.
With simple tools as we discussed in this blog, you get a full view of how currency changes affect your profits. You can then take timely actions to protect your money and grow your business.
FAQ (Frequently Asked Questions)