There are universally three international exchange rates used in countries around the world. The three exchange rates are, Commercial Rates, Customs Rates and a Carrier Rates.
Commercial Exchange Rates
Commercial Exchange Rates are the exchange rates used between traders and their banks. For exports, when a foreign currency comes into the seller’s bank account, the seller then has 30 days to sell that currency to their bank.
If they are not in a hurry to use that money, then they are free to speculate for 30 days, hoping the exchange rates will turn more in their favour. The seller is hoping that the local currency will become weaker so that the foreign currency would turn into more local currency than what was expected.
The seller can also “insure” or “fix” the exchange rate with the bank for some future period for when they think the foreign currency would come in. That insurance is called "Forward Cover". This, for a cost, gives the seller some peace of mind on a future locked value.
For imports, when the invoice in a foreign currency is due to be paid, the buyer would have to instruct their bank to pay the invoice, and the bank then buys that currency that day (spot rate).
The buyer is hoping that when the invoice is due, that the exchange rate would become stronger so that the bank will take less local currency from their bank account to pay for the foreign currency.
The buyer, like the seller, can also ‘insure’ or ‘fix’ the exchange rate with their bank for a future payment to be made.
Customs Exchange Rates.
Customs Exchange Rates are set by Customs themselves and look different as to how we see them in the media (e.g 0,08 R/$, means one rand would have a value of only 8 US cents). The governments take their own currency as a value of one against all other currencies and they could set this daily, weekly or over a fortnight, depending on the country’s system. If the Customs Exchange Rate shows a zero in front of the decimal point, then the foreign currency on your invoice is stronger than your local currency; our “one” currency can thus buy less than their ‘one’ of the currency on the invoice.
If the exchange rate shows a number in front of the decimal point, for example 10,0 Japanese yen, then the foreign currency on your invoice is weaker than your local currency, thus our "one" currency is valued more than one, in this example, one rand has the value of 10 yen.
The date that the cargo is loaded onto the carrier would determine the Customs Exchange Rate to be used as quoted by the government for that day or period.
Carrier Exchange Rates
Carrier Exchange Rates are set by the carriers themselves, for when you want to pay them in a currency other than what they quoted you for their services. They could charge you a CAF (Currency Adjustment Factor) for when the quoted currency becomes weaker between the time they quoted you and the time that you paid for the service. This does not happen when you pay the freight upfront, it may only be charged if the freight is going to be paid at destination, which would be at a later date than when quoted.
Contributed by Jim Merrington from MBA Exit and originally appeared in: