M 4
U
a
Select Page
We're here for you. Train online, facilitator led, using the world's most advanced simulation game.

It's time to replace stress with confidence.

“It was fun but before I knew it, I was negotiating better.”  

 
Updated: 13 Nov 2020

Foreign Currency Contract Agreement Risks

foreign currency

Summary

This case study reveals the importance of deciding on and making a foreign currency agreement with an international business partner.

When a negotiator embarks on an negotiating an international agreement with a foreign partner, they have to give serious consideration to which currency is going to be used in their financial transactions. There is a certain amount of risk that a company might have to assume as even veteran skilled negotiators consider whether they are going to issue or receive payments in a foreign denomination. It occasionally happens that between the time when a contract is signed, and when payment begins to flow, the currency of the foreign partner’s company could either increase or decrease dramatically. Any company that handles foreign currency faces the hazard of paying more or receiving less than it projected. The risk increases proportionately in relation to the duration or longevity of the contract agreement.

The value of any country’s currency typically depends on supply and demand. Any currency is affected by various factors. This includes the rate of inflation, economic growth, the internal political stability of the country, and interest rates, just to name a few. Many newer countries use their central banks to allow their currency to rise and fall within a narrow band, and may peg their currency’s value to a leading international currency such as the Euro, or British Pound.

Back in the 1980’s a small U.S. company signed a long term agreement with a Japanese manufacturer to purchase a brand of adhesive that was much cheaper than could be obtained in the U.S. The Japanese negotiating team was adamant that they were to be paid in Japanese yen. The American company, eager to lock in this cheap supply of this particular adhesive, agreed. This meant that the U.S. company would now assume any risk in currency fluctuation against the Japanese yen, and it’s rational to be risk averse.

At the time the agreement was signed the value ratio between the yen and the U.S. greenback was 185 yen to $1 U.S. dollar. For awhile the U.S. company prospered even more as the exchange rate fell from 250 yen to $1 U.S. It was looking like a really good bargain. Unfortunately, the tide shifted the other way and by 1988, the yen was valued at 140 yen to $1 U.S., much to the dismay of the U.S. company.

Needless to say, the U.S. company began to lose money and this jammed the company between the proverbial ‘rock and the hard place’. The U.S. company faced the additional burden in that they were facing such stiff competition from their competitors that they had no latitude to increase their prices. The agreement did not include any provisions to renegotiate the contract if faced with such a dramatic shift in the value of the rate of currency either, which was another serious drawback.

A negotiator who conducts an international negotiation has 4 choices to make regarding foreign currency risk contractual agreements when concluding an international joint venture. 1) They can both share the risk. 2) The foreign partner assumes the risk (Lose-Win). 3) Your side assumes the risk (Win-Lose). 4) One or both parties stipulate in the contract that the currency denomination is an area open to renegotiation, allowing for a certain percentage of rate fluctuation to occur.

Always remember that the longer the lifespan of the agreement – the greater the foreign currency risk component.

1 Star2 Stars3 Stars4 Stars5 StarsRate this Article
3.5 out of 5 from 2 responses
Loading...
4 comments
  • 0
    0
    Ralph A. Hayes on

    The article has valuable content, which has helped me a lot in understanding the Currency Contract Agreement. I think if anyone wants to become an expert in foreign currency agreements, then he needs to read your content consistently.

  • 0
    0
    Sophie on

    Helpful article.

  • 1
    1
    cristina on

    his is a wonderful opinion. The things mentioned are unanimous and
    needs to be appreciated by everyone.

  • 8
    2
    Dr. Piotr Jednaszewski on

    Good article, however at the very beginning we should be aware of the currency to be established in the agreement. And that also depends on the governing law of the country. Then all settlements shall be done for instance in Swiss Francs and recalculated into the local currency. Again the law of the country and the tax policy can have a strong influence on negotiators on the other side.

  • Leave a Reply

    Your email address will not be published. Required fields are marked *

     
    Our clients are reporting that their markets have become increasingly competitive. To just keep up demands sharpening your sales skills. Sales negotiation skills has the fastest and most easily measured payback. We can show you how to avoid being squeezed on price and losing deals from being 'commoditized'. Our unique Sales Negotiation Training turns the tide by allowing sales professionals to exceed targets, while strengthening key relationships. Read More
    Investment per participant
    $2,210USD
    Total investment
    $2,210USD
    Delivery Method: Online
    9 Feb, 12 Feb, 16 Feb, 19 Feb, 23 Feb, 26 Feb 2021 (Tuesday, Friday)
    6 instructor-led half day sessions
    11 am to 3:30 pm ET
    8 am to 12:30 pm PST
    Calum Coburn
    855-980-0126
    It's becoming increasingly difficult to achieve cost savings and add value. This training saves those on the buying side from losing money and choosing the wrong vendors. You will also be equipped to more confidently take control by negotiating internally with colleagues or stakeholders. Read More
    Investment per participant
    $2,210USD
    Total investment
    $2,210USD
    Delivery Method: Online
    9 Feb, 12 Feb, 16 Feb, 19 Feb, 23 Feb, 26 Feb 2021 (Tuesday, Friday)
    11 am to 3:30 pm ET
    8 am to 12:30 pm PST
    Calum Coburn
    855-980-0261
    Whether you're aware of it or not, you've been negotiating your whole life. We negotiate with our colleagues, customers, suppliers, bosses, family and friends. We negotiate for business agreements, higher pay, a better job, our home or car. We only get to choose whether we negotiate better or worse than others. Read More
    Investment per participant
    $1,325USD
    Total investment
    $1,325USD
    Delivery Method: Online
    9 Feb, 12 Feb, 16 Feb, 19 Feb 2021 (Tuesday, Friday)
    4 instructor-led half day sessions
    11 am to 3:30 pm ET
    8 am to 12:30 pm PST
    Calum Coburn
    855-980-0126
    Sending