Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsThe option will protect the importer from downward movements in thevalue of the Malaysian Ringgit, but allow the importer to benefit fromfavourable fluctuations in the Malaysian Ringgit.So if the Malaysian Ringgit increases in value, the importer can abandonthe option. If the Malaysian Ringgit diminishes in value, the importer canrely on the rate in the option. The maximum cost to the importer is thepremium. It is advisable to seek advice from your banker on which methodof hedging that will best suit your business needs.Alternative Methods to Manage Foreign Currency PaymentsIf your business has both cash inflows andoutflows, you can match these currencyexposures. The cash fl ows do not need to matchprecisely in terms of timing. The perfect hedge iswhere infl ows are received at the same time asoutfl ows are expected. However, this is rarely thecase. Where the timing of the infl ows and outfl owsdoes not match, then timing issue can beHINTForeign currencypayments can alsobe managed byimplementing alternativepayment methodsmanaged by depositing surplus foreign currency in a foreign currencybank account for later use, or by borrowing now to pay for foreign currencypurchases, and then using the foreign currency receipts to repay the loan.Negotiating to Pay or Receive in Malaysian RinggitThis means that the supplier or customer manages the foreign exchange risk.Be careful in this situation, as the supplier may increase the cost to coverthe possibility that the currency may move against them, or the customer mayexpect a reduced selling price to cover their risk.Goods Paid For at the Time the Agreement is MadeThis means that the goods will be paid for at the foreign currency rate at thetime of order; however, this also means that you will have to fund the goods fora longer period of time whilst waiting for the goods to arrive, and the exchangerate may be more favourable to you at a later date.TIPIt is advisable to speak to your banker to determine the best alternative tomanage your international trade payments111chapter 7-13 p79-181 Eng.indd 1118/15/11 5:02:59 PM