What Are The Different Foreign Exchange Insurances?

Currency insurance is a type of insurance for professionals who enter into commercial contracts in a foreign currency. It is used to cover them against the risk of losses due to an unfavorable change in the exchange rate when these contracts are negotiated or when they are signed, until payment is made.

What Are The Different Foreign Exchange Insurances

What does insurance change?

Foreign exchange insurance is a system that guarantees the exchange rate of a currency on a  commercial contract. An entrepreneur may indeed have to buy products, materials or any other form of service in a foreign currency. However, the value of currencies varies over time. Often, it even changes between the moment the entrepreneur makes his business proposal and the moment the payment is actually made.

This represents a risk for the entrepreneur, because if the rate of the foreign currency increases or decreases between the negotiation of the contract and the payment, then the transaction can cost him more than what he had initially planned. It is to limit these risks that foreign exchange insurance exists. They cover the entrepreneurs against the risk of loss of exchange.

What are the different foreign exchange insurances?

There are two main types of foreign exchange insurance: contract foreign exchange insurance and negotiation foreign exchange insurance.

Contract exchange insurance allows the entrepreneur to fix an exchange rate before signing a commercial contract. This insurance therefore does not cover negotiations that take place before the signing of the contract. On the other hand, it also applies within fifteen days following the signing of the commercial contract.

Negotiation exchange insurance, on the other hand, gives the subscriber the possibility of fixing an exchange rate during contract negotiations. It is important to specify that he can set this price at any time during the negotiations. The advantage of this insurance is that the contractor is covered until payment and if the negotiations do not ultimately lead to the signing of a contract, he loses nothing.

Some foreign exchange negotiation insurance also offer a “profit-sharing” option. It allows the subscriber to take advantage of the favorable evolution of the exchange rate, if necessary.

How does foreign exchange insurance work?

First of all, you should know that this insurance is intended for French companies that plan to conclude an export contract in a foreign currency. The exchange rate set with this insurance corresponds to the rate applied at the time of subscription of the insurance contract and also varies according to:

• From the date of entry into force of the commercial contract, on the one hand;

• Of the date or dates of payment, on the other hand.

Before subscribing to foreign exchange insurance, the company must also ensure that the foreign currency is taken into account by the insurer. Indeed, these insurances do not cover the risk of exchange loss on all foreign currencies.

The price for such insurance varies on a case-by-case basis. In general, it is paid in euros.