The Central Bank forecasts, through the Focus Bulletin*, that the dollar will end the year at the level of R$ 4.93. In the first two months of 2024, the American currency was below R$ 5. Exchange rate estimates change frequently, as the evolution of the rate depends on economic and political variables, and global events. As it is difficult to predict, and get it right, the evolution of the exchange rate, it is essential to have protection tools, which can enable businesses and open doors for investors.

‍

This need to create a protection net has even been recognized by the Federal Government, which announced the creation of the Eco Invest Brazil program, an exchange hedging tool focused on providing exchange rate protection for foreign investments in sustainable projects in the country.

‍

According to a note from the Ministry of Finance, the Inter-American Development Bank (IDB) will act as an intermediary in hiring an international bank that will offer foreign exchange insurance in Brazil. It will be up to the Central Bank to bridge the gap with investors in ecological projects in the country. The Ministry stated that, given the volatility of the real, the cost of foreign exchange protection for longer terms is so high that it makes ecological investments in foreign currency unfeasible, hence the importance of the new instrument.

‍

It is precisely this exchange rate fluctuation, which increases costs and reduces earnings, that is present in the daily lives of those who carry out international operations. To help these clients cross borders safely, Ouribank has a range of exchange protection options. The tool, created to protect companies from exchange rate fluctuations, offers the possibility of fixing future prices and helps to reduce foreign exchange risk in an efficient and secure way, in addition to reducing operating costs.

‍

There are three types of possibilities when hiring an exchange hedging: exchange rate lock, NDF, and exchange option. To decide which strategy is best, it is important to know the differences and to have specialized advice. Bruno Foresti, foreign exchange director at Ouribank, says that there is no ready standard or minimum amount to seek foreign exchange hedging. “We help each client decide how much of the amount they want to protect and we find the best option for each type of business. The idea is that the client can focus on the essence of their operation, on selling their products, and we take care of the exchange rate,” he says.

‍

Below is a generic example, with simulated rates, to understand the differences between the types of foreign exchange hedging operations:

‍

Company X scheduled, on February 10, 2024, an import of calculators from a supplier in China worth US$ 100,000. This import is scheduled to take place on August 10, 2024. On that date, Company X must make payment to the supplier in China, who in turn will send the electronics to Brazil.

‍

The exchange rate scenario at the closing of the deal is R$ 4.95, but the volatility up to the payment date cannot be calculated as it depends on external factors. To ensure that the transaction is secure, company X seeks Ouribank and has three options for hedging the exchange rate:

‍

1. Gearbox lock, known as an import lock

‍

This product is similar to the standard exchange transaction, but it is liquidated on a date greater than two business days and less than one year. Company X must present, when contracting the exchange, the documentation supporting the closing of the import exchange (Proforma Invoice issued by the Chinese supplier).

‍

For this operation, the bank offers a fee of R$ 5.25 per dollar, totaling a cost of R$ 525,000, to be paid on August 10, 2024. To guarantee this operation, the bank buys the dollars on the market today and charges those dollars to your account until payment day, which is why the price for settlement in 6 months is higher than the commercial exchange rate of R$ 4.95. For this operation, the bank asks company X for a guarantee of R$ 45,000. On the day the transaction is due, regardless of whether the exchange rate is R$ 5 or R$ 5.80, company X will pay the bank R$ 5.25 per dollar.

‍

2. Coin term, also known as NDF

‍

This product has the same price as the exchange lock operation, but it is a derivative. The main differential of this operation is that company X does not need to present exchange documents, since it is a derivative transaction referenced at an exchange rate. In addition, the term of currencies can also be contracted for settlement in periods longer than one year.

‍

On the day the transaction is due, if the dollar is above R$ 4.95, the bank will pay the company the entire difference between the maturity rate and the hiring fee. In the opposite scenario, it will be up to the company to pay the difference to the bank. In this solution, the bank requests the same guarantee amount of R$ 45,000 from the company.

‍

3. Exchange option

‍

Company X reported that it is afraid of a rise in the dollar, but that it is still comfortable with a cost per dollar of up to R$ 5.60. Above this amount, the operation is not feasible. With that in mind, Ouribank offers the company a solution called an exchange option, through the purchase of a call (call option) of dollars for August 10, 2024. Under this structure, Ouribank sells the company a right to buy US$ 100,000 on the due date for R$ 5.50. For this operation, the bank charges an amount of R$ 12 thousand. At maturity, if the dollar is higher than R$ 5.50, the bank will pay the company the entire difference, but if the dollar is below R$ 5.50, the company can simply relinquish its right to receive reimbursement (since there will be no amount to be reimbursed) and then it will buy the dollars at the market rate.

‍

It should be noted that the examples disregard possible costs resulting from taxation and taxes, whether as a result of capital gain or through the contracting of some other type of exchange, other than importation. Any customs, shipping, or insurance costs were also not considered. All fees and costs presented are merely illustrative, serving only as a basis of scenarios to exemplify each of the solutions. To find the option that best suits your needs and your company, contact us and request a conversation with an expert. Ouribank has over 40 years of experience and may be the ideal partner for your business.

‍

*last release 23/02/24

‍