When the Exchange Rate Moves, Orders Change Their Face
A deal that made 50,000 at signing was a 20,000 loss by settlement three months later. Nobody in foreign trade escapes the exchange rate.
In foreign trade, the exchange rate is the variable we control least — and the one that hits profit hardest.
This article lays out the exchange-rate pits I've fallen into, and how we work now.
A losing deal
In March 2022 we signed an order.
Amount: $680,000. The customer was in Ghana; terms were full payment against the bill of lading.
At signing, USD/RMB was 6.35.
At that rate, the deal was worth 4.316 million yuan. Our cost was 3.87 million; gross profit 446,000.
Net of freight, sundries, and financing costs, we'd clear about 270,000.
We were very happy with that deal.
The goods shipped in May, the bill of lading was issued in June, and the customer paid in mid-July.
In mid-July, USD/RMB was 6.78.
$680,000 converted to 4.61 million yuan.
We made an extra 300,000 on that deal.
Wasn't that a win?
Yes, that time it was. But the same logic runs the other way — into losses.
In September 2022 we signed another order, $420,000, customer in Egypt.
Rate at signing: 6.92. Worth 2.906 million yuan; our cost 2.67 million; net about 140,000.
At settlement in December the rate was 6.98 — nearly unchanged.
That deal was fine.
The real trouble came in 2023.
The time we lost
In March 2023 we signed an order for $530,000.
Rate at signing: 6.88. Cost 3.49 million; revenue at the signing rate 3.64 million; net 90,000.
Payment terms: three months.
At settlement in June, the rate was 7.21.
$530,000 converted to 3.82 million.
An extra 170,000.
Wait — that's another win, isn't it?
The problem was on the cost side
Everything above is the revenue side. The problem: our costs move too.
In the second half of 2023, our machine purchase prices rose with the domestic market. To lock in this batch of goods, we paid deposits early in RMB.
But part of the balance was paid after signing, and that part of the cost, at then-current prices, came in 8 percent over budget.
Besides, we quoted at the signing rate — the dollar price to the customer was fixed.
In other words, we carried the entire exchange-rate risk.
The deal that finally changed how we work
February 2024. An order for $310,000, customer in Tanzania.
Rate at signing: 7.19. Our cost 2.16 million; revenue 2.229 million; net 69,000.
The margin was thin to begin with.
Settlement in May at 7.11.
$310,000 converted to 2.204 million.
25,000 under budget.
Net profit fell from 69,000 to 44,000.
The deal didn't lose money — but the exchange rate ate 36 percent of the profit.
From that deal on, we changed how we work.
Our four rules now
Rule one: quote validity
All dollar quotes are valid for fifteen days.
If the customer hasn't confirmed within fifteen days, we re-quote.
This is printed in bold on the first line of every quote.
Customers didn't get it at first. We explained: the rate moves every day; I can't lock three months for you.
Most accept it.
Rule two: hedge big orders
For amounts over $500,000, we do forward settlement.
We sign a forward contract with the bank, locking the settlement rate three or six months out.
The cost is the bank's fee and spread — roughly one to three per thousand.
On a $300,000 order, hedging costs 3,000 to 9,000 yuan.
That cost goes into our quote.
Rule three: an exchange-rate clause
The contract states: if the rate on settlement day moves more than 2 percent from the signing-day rate, the excess is split fifty-fifty.
This clause was negotiated, not dictated by us.
Why do customers accept it? Because we commit in both directions: if the rate moves more than 2 percent in their favor, they get half of that too.
Two-way.
The clause has been in use since April 2024. Thirty-one contracts signed since; it's been triggered six times.
Four of the six, we paid the customer. Twice, the customer paid us.
Rule four: shorter payment terms
Shorten wherever possible.
Our standard terms: 30 percent deposit, 70 percent against the bill of lading.
For new customers, we ask for 50 percent down.
For terms beyond sixty days, we charge a financing fee — 6 percent annualized.
Some customers won't accept the financing fee. Those deals we don't take.
We'd rather take fewer orders.
Other currencies
Besides the dollar, we also deal in euros and cross-border RMB settlement.
The euro swings harder than the dollar; our euro quotes are valid only ten days.
Cross-border RMB settlement has grown in recent years, especially with customers that have Chinese-capital backgrounds. RMB settlement is easiest for us — no exchange risk at all.
We encourage customers to use RMB, but we never push.
A word to peers
On exchange rates there's no clever method, only the dull ones:
Keep quote validity short.
Hedge big orders. Don't gamble.
Write the rate clause both ways — that's why customers accept it.
Keep payment terms as short as you can.
And one more, the most important: never treat the exchange rate as a source of profit.
I've seen people make a windfall on a rate move, then start betting on it. Win once, lose once — and the loss hands back everything they won.
We're in trade. We earn on the goods. The exchange rate's money isn't ours to earn.