The stages of an export sale
Each stage of a sale changes the exposure: whether it exists, how certain it is, and when it will end.
| Stage | What happens | The exposure |
|---|---|---|
| Pricing | A price list or quote is issued in the customer's currency | Economically real, because the margin now depends on the rate, but uncertain: the customer may not accept |
| Contract negotiation | Currency, payment terms and any currency adjustment clauses are agreed | Allocated: the terms decide which side carries the risk, and for how long |
| Order confirmation | The customer commits to a quantity and price | Committed in amount; timing still estimated. The usual point to hedge |
| Production and procurement | Materials and services are bought, some perhaps in the same foreign currency | Partly offset by any costs in the same currency |
| Shipping | Goods are dispatched under the agreed delivery terms | Unchanged in amount; shipping often triggers the invoice |
| Invoicing | The receivable is recorded | Certain in amount, with a due date; on the balance sheet |
| Payment | The customer pays, on time or late | Ends for the receivable; timing risk if payment is late |
| Conversion | Foreign currency is converted, or held for future payments | Ends when converted; continues if the currency is held |
One sale, from quote to conversion
The manufacturer quotes $300,000 USD for an order whose costs are $370,000 CAD. It prices at the spot rate of 1.3700, planning revenue of $411,000 CAD and a margin of $41,000 CAD.
| Date | Event | USD/CAD | Value of $300,000 USD (CAD) |
|---|---|---|---|
| February 1 | Quote issued, priced at spot | 1.3700 | $411,000 |
| March 1 | Order confirmed. Forward booked to the expected payment date, June 30 | 1.3615 forward | $408,450 secured |
| May 1 | Goods shipped and invoiced on 60 day terms | 1.3500 | $405,000 |
| July 3 | Customer pays, three days late | 1.3350 | $400,500 |
- Margin planned at the quote$41,000 CAD
- Margin without a hedge, converting on July 3$30,500 CAD
- Margin with the forward booked on March 1$38,450 CAD
Three lessons sit in this example. First, $2,550 CAD of margin went before any hedge was in place: the quote was priced at spot rather than at the forward rate for the expected payment date, and the rate fell between the quote and the order. Second, the forward protected the rest of the margin from a fall to 1.3350, which would otherwise have taken about a quarter of it. Third, because the customer paid three days after the forward matured, the exporter had to extend the forward or settle it from other funds, at a small cost or benefit set by the market at the time.
When the exposure becomes meaningful, and when it can be hedged
The exposure becomes economically meaningful as soon as a price is fixed in a foreign currency, because the margin now depends on the rate. It becomes certain enough to hedge with a forward later, usually at order confirmation, when the amount is committed. Between the two, businesses use different approaches: a pricing buffer, quotes valid for short periods, options for tenders and large bids where the outcome is uncertain, or hedging a share of expected orders under a forecast policy. Hedging a quote in full with a forward, before the customer has committed, risks leaving the business with a hedge and no sale.
Contract currency and payment terms
Invoicing in the customer's currency moves the currency risk to the exporter, often because customers expect it. Payment terms set how long the risk lasts: 30 days is shorter than 90, and milestone payments spread the exposure over a project. Currency adjustment clauses, which share movements beyond an agreed band, can reduce the exposure on long contracts but need to be negotiated and administered.
Incoterms and timing
Incoterms rules set out the seller's and buyer's obligations for delivery, the costs each bears, and the point at which risk of loss or damage to the goods passes. They do not, on their own, determine when payment is due or when legal title passes; those depend on the sale contract and its payment terms. Delivery terms matter for currency planning because they often decide when the invoice is issued, but it is the payment terms that set when the exposure ends.
Reducing the exposure before hedging it
- Align revenue and cost currencies where possible, such as buying inputs in the currency of sale.
- Shorten payment terms, or offer a discount for early payment where it costs less than the risk.
- Keep quote validity short, or build the cost of protection into longer quotes.
- Involve finance early, so currency and terms are considered when the deal is negotiated, not after it is signed.
Sales, legal, operations and finance all shape the exposure through everyday decisions. Exporters that make currency part of those decisions reduce what has to be hedged later, and hedge what remains with better information.
This article is general information about managing currency risk. It is not investment advice or a recommendation to use any instrument, and examples use illustrative rates and amounts, not quotations. Products are offered in Canada by Vantry Capital Inc., subject to eligibility and credit approval.