Many of Australia s trading partners are members of the Madrid Protocol, including China, Korea, Japan, Singapore, the United States of America, and countries in the European Union. As a general rule of thumb, if you wish to protect your brands through trade mark registration in three or more of these territories, it will best be done through an International Registration filed using the Madrid Protocol.

What is the Madrid Protocol?

The Madrid Protocol is a treaty providing for a centralized system of trade mark registration. It allows for a trade mark to be protected in numerous countries with just one application and resulting registration. This can provide for cheaper and simpler management of your trade mark portfolio. For example, the application will attract just one set of fees, and changes to ownership of the registration or attendance on its renewal can be completed with a single request instead of multiple forms to different Trade Marks Offices. This can result in savings at the time of launch, and also in reducing subsequent maintenance costs.

Requirements for filing

Although administered through the World Intellectual Property Organization (WIPO), the initial paperwork for a filing can be lodged locally with the Australian Trade Marks Office and official fees paid in Australian dollars. The application for International Registration needs to be based on an Australian trade mark application or registration. This is referred to as the basic trade mark. It can be a long established Australian registration, an application filed immediately prior to the filing of the International Registration, or anything in between. The International Registration must have the same owner, be for the same mark and claim

the same or only some of the goods and/or services covered by the basic trade mark.

It is advisable to have the application for an International Registration prepared and filed by a professional experienced in such matters, such as a trade mark attorney, as certain amendments are not permitted once the application has been filed and there are deadlines to monitor and meet.

Registration process

Once an application for an International Registration has been lodged with the Australian Trade Marks Office, it is checked for formalities and, if all is in order the application is forwarded to WIPO where it undergoes further formalities and classification checks. Then, once all is in order, a Certificate for the International Registration is issued. This is a misnomer, as at this stage no registration rights have been secured. Rights are only granted once protection for the International Registration has been extended to designated countries. This usually occurs after national examination processes.

WIPO sends the details of the International Registration to each of the relevant Trade Marks Offices, which then treat the International Registration in much the same way as they would a nationally filed application. Each national Trade Marks Office has its own requirements for registration. Where no objections are made by the Trade Marks Office, and no opposition is filed by a third party, the International Registration can proceed to protection in that particular country without any further action being taken.

Where objections are raised, the applicant has the option of responding to the objections or taking no further action. Sometimes an objection is made in respect of only some of the goods and/or services claimed. In some countries, like Australia, even where no response is filed, in the absence of opposition from a third party protection for an International Registration will automatically be extended to all of the other goods and services. If a response is to be filed, an address for service in the relevant designated country will be required. You will need a trade mark attorney on the ground and Australian attorneys have access to associates worldwide.

International Registrations are afforded the same rights as nationally filed applications. The protection provided by an International Registration runs for a term of 10 years from the date of its filing and can be renewed indefinitely on payment of the appropriate fees. It is possible to add further countries to the International Registration as your business grows and/or as more countries join the treaty. For example, preparation is currently being made for New Zealand to join the Madrid Protocol.

Dependency period

It should be noted that the International Registration is dependent on the Australian application or registration on which it was based for a period of five years after the filing date of the International Registration. Accordingly, owners of International Registrations should ensure that the basic trade mark is not compromised during the five-year dependency period. Otherwise, the International Registration risks cancellation, for example, through a failure to renew the basic mark or through a successful removal action for non-use.

There is an increased risk when basing an International Registration on an Australian application because if the application does not proceed to registration, the International Registration will be cancelled. In the event of a cancellation there is, however, a limited time in which it is possible to transform the International Registration into corresponding national applications or registrations.

When to act

An application for an International Registration can be made anytime once a basic trade mark is in place. Where the International Registration is filed within six months of the filing of the basic trade mark, it can receive the benefit of the basic trade mark’s priority date. This effectively backdates the filing date of the International Registration, and this strategy of claiming convention priority can be used to spread filing costs between an initial, national filing and an International Registration.

This strategy can also be used to assess the prospects of an Australian application before committing to an International Registration for the same mark. The Australian Trade Marks Office currently examines applications within four-to-five months of filing; however, this period can be shortened to one-to-two months by applying to have the examination expedited on the basis of wishing to file a corresponding application overseas.

The best way to assess the availability of your chosen trade mark and the likelihood of your Australian application or International Registration proceeding to registration is by conducting a thorough clearance search. This involves an assessment of pre-existing rights and is best conducted by a professional advisor before you launch a new brand.

Conclusion

Securing registration for your brands in all relevant markets is an important step in protecting your business. This is often best done through an International Registration, which can streamline the process for obtaining and maintaining these rights and can achieve this in the most cost-effective and expedient manner.

–Michelle Cooper is a Senior Associate with Shelton IP.

Online: www.shelstonip.com

“Some of the reason for the non payment or late payment in China is not only the financial difficulty for companies but, for a large majority of cases, due to either internal difficulties or particular management of procedures or disputes,” he notes.

Identity

The first thing is to correctly identify your client. In China there are a lot of companies with similar names. They have a legal name in Chinese and also a translation name which is not necessarily the legal name. There is one unique registration number by company and by province. It’s a very good way to make sure you’re dealing with the right company .

Obtain structured information about the investors that capitalise the company, where it’s located, the size, their production facilities, who are their main suppliers, their clients, what kind of payment terms do they offer, are they working with banks, what kind of banking facilities can they obtain, what is their financial situation? If possible cross-reference the information.

Payment terms

If you want to sell to these companies you have to open account facilities for credit, otherwise you’re out of the market. If you grant facilities you must make sure to be paid back when payment is due. If this is not the case you need to ensure your risk is secure by using third parties. Credit insurance which is becoming more popular in China only among foreign companies. Chinese companies espeically the medium and large sized companies are getting more sophisticated. More than 85 percent of the companies that we interviewed have their own internal credit management procedures. It’s a sign that the market is more structured and that companies are more aware of the risks.

Getting paid

Late payments or non payments are the first source of companies’ defaults worldwide. There has been improvement, partly linked to the improvement of the economic situation, partly to the strong support of the Chinese government with the stimulus package, but the government is progressively withdrawing its support.

The government wants to rationalise some of these industries where there is over-capacity and where they are not competitive. Object number one of the central government in China for 2011 is to reduce inflation risks so it will tighten borrowing and lending conditions, and interest rates will be increased, so some of the companies will have more difficulty in obtaining finance.

Partnerships

If you want to do business with Chinese companies, know them well and have protection for domestic or export transactions. Traditionally the types of companies that have been perceived as the most risky were the private companies for the very simple reason that they are usually small companies, family type businesses, labour intensive and under-capitalised, but they are also the most dynamic ones and have developed very rapidly. Interestingly, I think recently over the last couple of years the risk has reduced.

With joint ventures it’s more a question of successful cooperation between foreign and Chinese companies. It’s probably where the control aspect comes into the picture. Get a legal opinion before entering into a joint venture. If you want to do business and have any type of structure in China I think legal advice is a must.

—Coface’s Corporate Credit Risk Management in China (Payment Survey) was conducted from October to December 2010, with a cross-section of 1,071 companies in mainland China.

The Reserve Bank of Australia recently released the minutes for its Board meeting held on 3 May when it decided to maintain interest rates at 4.75 percent for the sixth straight month. The minutes offered some insights into the sentiments of the Board which noted that interest rate hikes were likely to be necessary in the future if inflation remains consistent with its medium term target. This is a clearer indication on rates from the Board than has been the case in recent months. While a rate hike would likely push the AUD higher, a rate rise can still not be seen as being imminent largely because of a number of other factors at play. For example, employment data for April was weaker than analysts expected, with the number of people employed in April falling by 22,100. The number of full-time jobs declined by 49,100 whilst part-time employment rose by 26,900.

IMPACTS:

Although the weaker than expected employment data initially led to a slight weakening of the AUD, it has since recovered. The currency continues to trade in the region of USD1.05.

The Board’s minutes suggested it will act on interest rates for the interests of the overall economy – indicating a willingness to increase rates if, as is occurring now, some parts of the economy outperform others and push up inflation. The resources sector is a stark illustration of this with overall employment in Queensland and Western Australia increasing by 22,900 – thanks largely to the mining boom. This compares to a decline of 56,200 jobs in New South Wales and Victoria.

Market expectations are for at least one, and possibly two, rate increases before the end of the year. With the currency markets already pricing in one rate rise, further clarity on a second rise would push the AUD higher against most currencies, especially the US dollar. Eyes will be on the next release of inflation and jobs data which will play a significant role in the timing of future rate rises.

CONSIDERATIONS:

The Australian dollar continues to trade in record high territory. This is largely due to the benefits the country is enjoying from the ongoing growth of the vast Chinese economy and its demand for Australian resources. While the official cash rate is a key driver of the strength of the AUD, one of the most significant reasons for the strength of the dollar at the moment is not domestic—it’s the weakness of both the Euro and the US dollar. As such, for Australian businesses, watching the RBA Minutes is probably less important than tracking the relative strength, or weakness of the US dollar and the major European economies. Adding further complexity is the AUD’s popularity with currency speculators. Much of the upward movement in the AUD in recent times has actually been driven by sentiment and the actions of currency traders who are looking to make short terms gains. As the currency’s popularity with speculators has increased, it has become partially decoupled from the fundamentals that typically guide currency movements. Being a favourite of speculators means our currency is especially prone to substantial volatility and corrections. A correction in the currency could occur as soon as market participants lose their appetite for riskier investments and sell their AUD holdings in favour of safer investments.

In this environment, volatility is likely so businesses need to ensure that they properly manage their currency risk. A sudden downturn in the Australian dollar would have a significant impact on importers who, if unhedged, would find themselves paying more for imported products and raw materials. Likewise, exporters who are hedged at current levels would be locked in at a higher exchange rate than necessary.

EVENT:

The Australian Bureau of Statistics announced that total employment decreased by a seasonally adjusted 10,100 jobs during the month of January. The market was expecting an increase of 20,000 jobs.

This headline figure hides the positive fact that 47,000 full-time jobs were created during the month with the drop in total employment being caused by a fall in part-time employment of 57,700 jobs.

Chinese trade data released today saw China slip into a trade deficit – its largest since February 2004. The deficit amounted to US$7.3 billion with analysts expecting a surplus of US$4.95 billion.

IMPACTS:

The AUD initially retreated to close to a two week low against the USD in a knee-jerk reaction to the headline figure of a drop of 10,100 jobs. However, as the market digested the significant increase in full-time jobs, the AUD quickly stabilised.

This growth in full-time employment signifies a robust, strong Australian economy. The number of overall hours worked in the Australian economy increased by 1.1 percent which is further evidence of this strength and suggests that not too much should be read into this small fall in the total number of jobs, which was prompted by a dramatic fall in part-time employment.

The employment figures are unlikely to change the outlook on interest rates with rates likely to stay on hold in the short-term. The market continues to expect one interest rate rise before the end of the year, which has largely been priced into the AUD resulting in the AUD trading within recent ranges.

News of China’s trade deficit later in the day saw the AUD drop sharply to $1.0040. The deficit could suggest a more pronounced slowdown in China and a possible flattening in demand globally.

CONSIDERATIONS:

The flood disasters in Queensland and Victoria played a significant role in the overall employment data with both states seeing significant reductions in employment. The total number of jobs in Queensland fell by over 22,000. As the rebuilding efforts moves ahead at full steam, employment data is likely to improve in both states.

The unemployment rate of five percent remained the same as January. This is a positive sign as most economists see employment rates below five percent as a sign of ‘full employment’ which often leads to inflationary pressures due to unfulfilled demand for labour putting pressure on interest rates. All eyes will be on the next round of unemployment data, due out in early April, for any signs of further tightening in the labour market which may put pressure on the Reserve Bank to hike rates more than once between now and Christmas.

More broadly, the continued strength of the economy will continue to support current trading levels for the AUD in the 0.9700 – 1.0200 range, so exporters can expect little relief in the near term. Improved economic conditions in the US and European economies and a reduction in risk aversion around the instability in Libya and the Middle East will be key drivers of any downside risk in the AUD in the short term. Continuing signs of weakness in the Chinese economy could also see downward pressure on the AUD.

However, exporters should not get their hopes up too soon, with the February retail trade figures to be released on 31 March likely to underpin just how strong the Australian economy is performing.

Event

Recent commentary from the Reserve Bank of Australia (RBA) reveals a buoyant outlook on the Australian economy.

Both Glenn Stevens’ parliamentary hearing and the release of the RBA board meeting minutes have contributed to ongoing positive sentiment of Australia’s economic strength, relative to other countries in the wake of the global financial crisis.

The RBA also virtually confirmed there would be no short-term increases to interest rates with rates on hold until the middle of the year. This will be a key driver of the AUD in the ensuing period and with certainty about interest rates there are unlikely to be major short-term upward movements in the dollar given the market has already priced in an interest rate rise later in the year.

Impacts

RBA boss Glenn Stevens has told a parliamentary hearing in Canberra that he does not expect rates to increase in the near future and that current rates are suitable for the present economic environment.

This, coupled with the release of the RBA’s minutes last week, led to the market concluding that rates will be on hold for the first half of this year with one or possibly two rate hikes to follow in the second half.

Travelex is of the opinion that this hold on interest rates reflects a degree of political diplomacy on the part of the RBA, given the recent spate of natural disasters plaguing Australia’s east coast has resulted in a series of price shocks and a rate rise on top of this would be unpopular.

However, with the terms of trade figures expected to peak higher and later than expected there continue to be strong signs of the robustness of the Australian economy. The RBA boss’ commentary on the Australian economy emboldened speculation that interest rates will be on hold until mid year or possibly longer.

The strength of the Australian economy is further highlighted by trade data released early last week showing stronger than expected levels of Australian imports and exports with China.

While this view is shared by many analysts, the market is divided on whether there will be one or two rate hikes this year. This discrepancy is potentially significant because of the uncertainty of the extent to which future rate hikes have been fully priced in by the market.

Considerations

While interest rates are likely to remain stable in the short term, the likely future hikes in interest rates will create upward pressure on the AUD. However, with one rate increase already priced in by the market for this year, the real action on the dollar will follow a second rate rise which will inevitably push the dollar higher.

External factors, such as economic improvements overseas, especially the somewhat unexpected strength of China’s economy in recent times, means the AUD’s relative strength over many trading economies will be subdued in the next six months.

We expect this to effectively counteract any upward trend on the currency resulting from a second rate rise later this year. Watch for improvements in the Chinese and major European economies in the next few months as these are likely to be the main drivers of the AUD’s direction.

Continued improvements in the major global economies will push the dollar lower, though Australian exporters will see little short-term relief from historically high trading ranges see in the last few months.

—Anthony Gray is the Head of Client Management, Northern Region, Travelex (www.travelexbusiness.com.au/).

A hedge is any strategy that allows you to minimalise or remove financial risk. For foreign currency, this mean a strategy employed by businesses to reduce their exposure to foreign currency market movements and to provide more certainty and cash flow, defines Barry Fletcher, director of Business Development for Australia and New Zealand at American Express Foreign Exchange International Payments.

For exporters who deal only in Australian dollars, that is, who buy and sell wholly in Australian currency, you can stop reading here. But for everyone else buying and/or selling in currencies other than AUD, hedging is an essential part of maintaining your margins.

Why hedge? As an exporter you will almost certainly price your goods in a foreign currency to compete globally. The price at which your buyers purchase your goods or services will therefore be subject to currency movements until the time they pay their invoices—this could be 90 days down the track and the rate could have changed 20 percent since the sale. Hedging minimises the impact of those currency movements to allow you to retain your margins.

Hedging strategies

The first step is to understand how exchange rates affect your pricing. “The question has to be what FX rate an exporter has built into their pricing. They need to hedge at that point or better, then they can forget what the market does because they’ll have that price risk covered,” Fletcher says.

“If you don’t have much fat built in, you can’t really afford to stay at the whim of the market because there is going to be a time when the market will work against you and that will erode all your profitability.”

One of the easiest ways to avoid exposure to currency fluctuation is by holding a foreign currency account, which gives you a ‘natural’ hedge. If a lot of your costs and earnings are in US dollars, for example, it makes sense to have an account in that denomination because you don’t have to convert anything until you need the money in Australia. Then, “if your cash flow is strong enough, you can leave those US dollars in the account until the rate is beneficial to you,” says Fletcher.

Beware of volatility

From an exporter’s perspective, the risk inherent in selling your product in a foreign currency is that if the value of that foreign currency falls, it impacts on the amount of local currency you can ultimately bank as revenue.

Aim for stability

Generally your goal in developing a foreign exchange risk management program is to stabilise your cash flow and gain a higher level of certainty. There are four primary ways to achieve this:

Invoice in Australian dollars: The ultimate method to protect your business from currency movements is to invoice in Australian dollars and therefore remove the necessity to exchange altogether. In reality, however, this is often very difficult to accomplish and may dilute your value to prospective customers. The vast majority of exporters we partner with are focused on finding as many customers in as many markets as possible. The last thing they want to do is create extra hurdles that may render themselves uncompetitive.

Open a foreign currency account. It may be worthwhile to consider opening a foreign currency (FC) account, particularly if you only deal in one of the major currencies such as US dollars. Your customers can transfer funds directly into this account and you then have the ability to covert into local currency when the rate is preferable. Of course, your ability to hold funds in an FC account over a period of time will be determined by the strength of your cash flow. If your business model includes both import and export in the same foreign currency, then an FC account is almost mandatory as it provides you with a natural hedge. Always remember it is important to gain a clear understanding of what fees and charges are applicable for holding a FC account to ensure the expense doesn’t outweigh the benefit.

Consider forward contracts. The majority of exporters, particularly small-to-medium-sized companies, only use spot transactions, in other words, the prevailing rate on that particular day, to manage their forex requirements. Most are unaware they may be able to hedge their forex exposure via a forward exchange contract. A forward exchange contract (FEC) is a contract to exchange one currency for another, for example to sell US dollars to buy Australian dollars, at a specified rate, for a specified amount, for delivery on a specified date some time in the future, although almost always within 12 months.

The global financial crisis and resulting recession across Europe and the USA has caused extreme volatility in currency markets over the last 18 months. Australian exporters who earn revenue in foreign currency have been severely impacted by wild fluctuations in these currency markets. Increasingly, Australian exporters are turning to currency options to hedge their currency exposures, but like all hedging tools, these products have their strengths and weaknesses.

A currency option gives the buyer of the option the right, but not the obligation, to buy or sell a currency at an agreed rate for a future date. Currency options can be simple vanilla types such as a ‘call option’ or a ‘put option’. However, there are many types of options available and complex financial engineering strategies can be devised using a combination of different option products.

A key point to remember for exporters is that the more complex an option structure becomes, the more expensive it becomes. Also with increased complexity, the harder it is for exporters to understand their risk exposures and calculate the value of the option structure. Many exporters will not have adequate systems in place to calculate either.

Call option

This is an option where the buyer has the right, but not the obligation, to buy a currency at a set rate on a future date. Exporters, for example, could use an AUD/USD call option to protect their profit margins by buying the right to buy AUD/USD on a future date.

Example: An exporter has contracts where they expect to receive US$1 million by April 30, 2010. Buying an option is a good idea if the current spot AUD/USD rate is 92 cents and the exporter is concerned the AUD/USD may rise before April 30 and wishes to protect the profit margins.

The exporter may then buy a 95-cent call option for expiry on April 30, 2010. If the spot AUD/USD is above 95 cents at expiry, the exporter will exercise his right to buy AUD/USD at 95 cents. If the spot rate is lower than 95 cents, the exporter will allow the option to expire, and buy the AUD/USD at the prevailing spot AUD/USD rate.

Strengths: Profit margins protected at 95 cents, with unlimited downside potential if the AUD/USD rate should experience sustained weakness by maturity.

Weakness: Exporters will be charged a premium to buy the option, which is non-refundable, affects cash flow and adds to operating costs.

Put option

This is an option where the buyer has the right, but not the obligation, to sell a currency at a set rate on a future date. Importers, for example, could use an AUD/USD put option to protect their profit margins by buying the right to sell AUD/USD in the future.

Zero cost option

This option is a structure that is a combination of both a call and a put option, also known as a collar option. An exporter using this method would buy a call option, and at the same time sell a put option. The cost of the call option, which protects the exporter from a rising AUD/USD, is offset by the premium earnt from selling the put option.

Example: If a spot AUD/USD rate was 92 cents, the exporter may buy a 95-cent call option, while selling a 90-cent put option. At maturity, if the AUD/USD is above 95 cents, the exporter exercises the right to buy at the lower rate of 95 cents. If the AUD/USD is below 90 cents, the buyer of the put option will exercise their right to sell the AUD/USD. If the AUD/USD is in between 90 cents and 95 cents, the exporter allows the options to expire, and simply does a spot transaction at the prevailing rate.

Strengths: Zero cost means the strategy can be put in place with no upfront premium. The exporter has complete protection both sides of the market and can work out profit margins, revenue generation and budget projections.

Weakness: Should the AUD/USD rate weaken sharply, the exporter is unable to take advantage of that as the purchaser of the 90-cent put option will exercise their option to sell AUD/USD at 90 cents should AUD/USD be lower at expiry.

Naturally, many market economists have also speculated as to how the high exchange rate would affect exporters. The general school of thought says that an appreciation of the exchange rate – that is the Australian dollar is more expensive in terms of US dollars – makes Australian exports more expensive and imports cheaper.

Goods and services exports that are particularly price elastic, where consumers are sensitive to prices changes, may see demand fall sharply, while price elastic imports will see a big pick up in demand. This is assuming, of course, that lower prices are passed on.

Business groups are also worried, particularly in areas like agriculture and manufacturing where higher commodity prices are not on offer like their resources counterparts. While non-rural commodity prices have been holding up better than expected – thanks to the China’s insatiable appetite for coal, iron ore and liquefied natural gas – other sectors of the economy have not been so fortunate.

However, when you look at the dollar’s behaviour and its effect on exporters more closely, there is a little bit more to it than first meets the eye.

The dollar isn’t everything

Firstly, the exchange rate is just one factor affecting the decision to export. Most of the economic evidence shows that since the Aussie dollar was floated over two decades ago, exporters have become used to fluctuations in exchange rates as part and parcel of doing business offshore.

Why is this so? Basically, since the Australian economy became more internationalised, the majority of our exporters don’t let fluctuations in exchange rates ruin their business plans. They see a moving exchange rate as a fact of life of operating in the global economy and make their decisions based on long-term plans and building strong relationships with clients, customers and business partners.

One lesson of the Asian financial crisis that occurred a decade ago was that Australian firms that stuck in the region ‘through thick and through thin’ were well regarded in Asia when the economies bounced back. Nobody likes a carpet-bagger who takes off when the going gets rough only to magically re-appear when times are good again. We’re seeing similar things occurring in the global financial crisis too.

In fact, according to research by Austrade and DHL, while most exporters regularly monitor the exchange rate, only 20 percent believe that it will affect their decision to further invest or expand their overseas operations.

Many exporters also undertake hedging in their contacts to mitigate against future changes in the exchange rate. According to the survey data, 24 percent of large and 25 percent of medium-sized exporters engage in some form of hedging compared to only five percent of small exporters and four percent of microbusinesses.

Secondly, other economic factors are important. Of course, strong commodity prices matter, as does overall growth in the world economy. Long-term growth in export volumes are mainly determined by global economic demand, so return to growth in the world economy – particularly in the Asia-Pacific – will be a more important factor affecting exporters than a 90-cent-plus exchange rate. If the emerging economies can lead the recovery from the GFC then this will be crucial for our exporters.

Thirdly, most media commentary says that exporters will be losers from a high dollar and importers will be winners. But they are not two distinct groups. Around 45 percent of Australian exporters are also importers, so a high dollar may mean a more expensive product on the price side, but it may also be cheaper on the cost side when an exporter imports components or stock. It’s a matter of swings and roundabouts.

Don’t get me wrong, exporting is a tough game. But it is also commercially rewarding as exporters, on average, earn high profits, are more productive and grow faster than non-exporters. They can therefore absorb external shocks in exchange rates and commodity prices as they are in it for the long haul.

Australia is one of the few economies in the world to achieve export volume growth despite an 11 percent fall in world trade in 2009. That Australian exporters have achieved this, despite the GFC and the associated ‘recession porn’ we read in the press, is a remarkable achievement and helps explain why the Australian economy has gone from ‘Down Under’ to ‘Down Wonder’ in the eyes of many international investors.

—Tim Harcourt is chief economist of Austrade and author of The Airport Economist. See his column at www.austrade.gov.au/economistscorner

If you’re the kind of exporter who watches exchange rate movements with a little trepidation, maybe it’s time to consider ways of managing your money beyond the daily rate.

Fluctuations in the foreign currency market occur for various reasons, but are mostly in tune with traders’ appetite for risk. But the perception of risk changes daily—even hour-by-hour—as political announcements occur, company information comes to light and global events unfold.

To avoid the whims of traders, exporters dealing in foreign currency for business transactions are advised to lock in a forward exchange contract.

Put simply, a forward exchange contract is an agreement between you and your provider to exchange a specified amount of one currency for another currency on a particular date, using a set rate calculated at the point of making the contract.

The aspect that you need to remove from your thinking is that the forward rate is a prediction of the exchange rate at that future date—it is not.

“A forward exchange contract is made up of two components: the spot component, which is effectively the rate of the two currencies on the day, and the forward component, which is a reflection of the interest rate differential, the difference between the interest rate in one country versus another over that time period,” explains Tim Keith, head of Treasury Management at the National Australia Bank. “At the end of the day there is no other mathematically correct way to do it.”

Anyone with foreign currency transaction in their business should consider setting up a forward exchange arrangement with their financial institution; most providers will offer this once they understand the foreign exchange requirements of your business.

“Any business that has exposure to a currency through importing, exporting or trade of some sort should consider the use of forward exchange contracts. It doesn’t matter if you’re big, small or in between,” says Keith.

He suggests that a forward exchange contract should centre on existing supply contracts you have with customers.

“In some markets that’s just from month-to-month,” he says. “Meat is a classic example where there are no long-term supply contracts, they tend to have much smaller tenure forward exchange contracts or they just use the spot market, whereas there are other businesses that have contracts to supply 12 months or two years out. That will obviously increase the tenure of their contract.”

Forward exchange contracts can be negotiated for up to 10 years into the future, though this length of tenure is understandably rare. “It’s really uncommon because no one has [supply] contracts out for 10 years. What they’re saying is that they don’t consider that their business model will change dramatically in a 10-year period and therefore they’re willing to lock in their cash flow,” Keith explains.

Your relationship with your exchange provider will help you decide what’s appropriate for your business, so be open about what you want to achieve and what you want out of the contract.

“They might say ‘I want to lock in a rate for 12 months’ and then after we talk to them and understand their business, we find out they’re actually going to be paid the currency in six months we’ll say ‘Why are you going for 12 months out?’” says Keith. “That’s simplistic case but that’s the process followed.”