Exchange lock x NDF: what is the ideal tool for your business?

The rise and fall of the exchange rate directly impacts the last line of the balance sheet of companies that carry out international operations. Therefore, the tools of Foreign exchange hedging may be an option to bring predictability and security.

According to Saulo Moreira, Commercial Superintendent of Ouribank, there is no defined business sector or minimum amount to seek foreign exchange hedging. “We help each client decide how much of the amount they want to protect and find the best option for each 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.

The tool, created to protect companies from exchange rate fluctuations, offers the possibility of Fix future quotes and it helps Reduce exchange rate risk in an efficient way, in addition to Lower operating costs. There are two most common types of currency hedging: Gearbox Lock and NDF.

Difference between Gearbox Lock and NDF

To understand the main differences and help when choosing, the Ouribank Blog collected information about the two modalities and prepared a generic example, with simulated rates, to understand the differences between the types of Foreign Exchange Hedge transactions. Check out the following:

Company X scheduled an import of pens from a foreign supplier worth US$ 100,000 on August 10, 2024. This import is scheduled to take place on February 10, 2025. On that date, Company X must make payment to the supplier, who in turn will send the pens.

The exchange rate scenario at the closing of the deal is R$ 5.50, but the volatility up to the payment date cannot be calculated, as it depends on external factors. To ensure that the operation is safe, company X seeks the Ouribank and you have the following options to do the Foreign Exchange Hedge:

1. Gearbox Lock

A Gearbox Lock It is similar to the standard exchange transaction, but it is liquidated on a date greater than two business days. In the present case, if the negotiation has already taken place, company X presents, at the time of contracting the exchange, the documentation that supports the closing of the import exchange (if the negotiation is not yet closed, the documents may be submitted later).

For this operation, the bank offers a fee of R$ 5.70 per dollar, totaling a cost of R$ 570 thousand, to be paid on February 10, 2025. 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 at that time.

On the day the transaction is due, regardless of whether the exchange rate is R$ 5.50 or R$ 6.20, company X will pay the bank R$ 5.70 per dollar.

The logic is similar for cases of receiving funds from abroad. Consider that an entrepreneur will receive US$ 100,000 from a client abroad after providing the service. However, if the dollar devalues a few cents between the trade date and the receipt date, the profit margin can be fully consumed.

Thus, with the Exchange Lock it is possible to freeze the currency price at a rate suitable for business planning. Thus, even if the dollar undergoes a devaluation, the company will have predictable accounting and will not face losses.

Advantages:

· It is not a loan;

· It allows the customer who sends or receives funds from abroad to choose when to lock the exchange rate of their operation.

· It can be done before or after the shipment of the goods or the provision of the service;

2. Coin term, also known as NDF

O NDF (Non—Deliverable Forward) 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.

On the day the transaction is due, depending on the exchange rate and the client's position (purchase or sale), the bank will pay the company the entire difference between the maturity rate and the contract fee. In the opposite scenario, it will be up to the company to pay the difference to the bank.

Advantages:

· There is no daily adjustment, only when the contract is settled;

· The amounts, expiration, and future prices are negotiated upon purchase;

· They may close partially or completely;

· Has flexibility regarding deadlines;

· Lock an exchange rate;

· Pay or receive the adjustment at the specified due date.

A foreign exchange specialist for over four decades, Ouribank has specialists ready to understand the needs of each company, helping to make the most advantageous and secure choice. Click here to learn more about Foreign Exchange Hedge solutions and talk to our experts!

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