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contracting currency in cash or in cash.

When your foreign trade operations take place in a currency other than the euro, you are taking on additional risk, known as exchange rate risk. This volatility can be see in the following graph illustrating EUR/USD exchange rates:

grafico contratacion divisas

When managing currency, there are two options:

  • Spot exchange rate: When making a payment or receiving funds, you have the option of agreeing a spot exchange rate; in other words, you will be credited or debited the number of euros corresponding to the agreed price according to the rates given by the currency market at that time. Normally, exchange rate desks of banks and financial entities have a timeframe within which the exchange rate can be agreed.
  • Forward exchange rate: when you are expecting to make or receive a payment at a future date, you can take out exchange rate insurance. Let’s look at the different types of insurance available and how they operate:
    • Fixed-date or closed exchange rate insurance: buy/sell currency for a set amount and on a set date. This formula should be used when you know the exact amount and date of the payment you are to make/receive.
    • Open exchange rate insurance: buy/sell currency at a closed price for a specific amount, but this option allows you to use this facility with no fixed calendar or schedule, as long these operations they take place before the deadline known as the expiry date of the exchange rate insurance. This type of operation is usually used for example in the case of farming companies that wish to guarantee the exchange rate for the whole of their campaign, but as they receive payments they wish to credit euros into their account at the exchange rate agreed in the insurance.

Remember that exchange rate insurance is classified as a complex product by MIFID regulations (Markets in Financial Instruments Directive). Therefore, in order to offer products and services coherently with the risk profile and characteristics of their customers, banks and financial entities will ask for any information required to ascertain your investment profile and your financial knowledge, all in accordance with the aforementioned regulations.

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