Currency exposure and quotation validity

Why a quote has a shelf life

A supplier builds a quotation from today's costs: the metal price, the exchange rate, the wage rate, the freight estimate and the margin. Some of those inputs are fixed for the life of the order. Others move daily. The validity period is the supplier's estimate of how long the assumptions can hold.

A thirty day validity on a part with a high copper content is not the same risk as a thirty day validity on a machined plastic part. The first quote can be out of date before the purchase order is raised. The second may still be accurate after ninety days.

Buyers tend to compare the headline number and ignore the date. That works when the market is quiet. It fails when a currency moves several percent in a month or a metal price spikes. The resulting conversation is usually about the price, when the real subject is the assumption.

A useful test is to ask what would have to change for the quote to be wrong. If the answer is a large move in one input, the quote needs a mechanism for that input. If the answer is a small move in several inputs, a shorter validity may be enough. The test separates a genuine fixed price from a price that is fixed only in appearance.

The exposures inside a price

A quotation can carry several exposures at once. The table separates them so each one can be assigned to a party and a control.

The first step is to find out which currency the supplier actually pays for its inputs. A supplier that buys copper in dollars, pays labour in rupees and quotes in euros has a layered exposure. A single clause may not describe it, and a single hedge may not cover it.

Reading the validity clause

A useful validity clause answers four questions. What is the price valid for? Which inputs are fixed inside it? What happens when an input moves beyond a stated threshold? How is the movement calculated and evidenced?

A clause that says only valid for thirty days leaves the adjustment method open. A clause that says valid for thirty days, subject to the LME cash average and the exchange rate on the date of the order, with a two percent band, is a working mechanism. It tells both sides what will happen without a negotiation.

Check the currency of the quote against the currency of payment. A quote in US dollars with payment in euros carries a conversion step. If the clause does not say which rate and which date, the buyer and seller can reach different numbers from the same quote.

Ways to share the movement

A fixed price gives certainty but prices in the supplier's risk. The supplier may add a cushion, or refuse a long validity on a volatile input. An indexed price removes the cushion but exposes the buyer to the movement. Most workable agreements sit between the two.

A band, or dead zone, ignores movements inside a stated range and adjusts only the portion outside it. A cap limits the buyer's exposure but may cost more at the start. A collar shares the movement above and below a range. A periodic reset, monthly or quarterly, keeps the price close to the market without renegotiating every order.

The choice depends on the part and the market. A long programme with a stable design can support an index. A one-off tooling order may be better on a fixed price with a short validity. The important point is to write the mechanism down and apply it the same way each time.

A worked example helps the conversation. For illustration, if the metal content is 40 percent of the price and the band is 5 percent, a 3 percent metal move changes nothing, while a 12 percent move changes the portion outside the band. Walking through that arithmetic with the supplier shows whether both sides read the clause the same way.

Payment currency and conversion

If the supplier's costs are in rupees and the buyer pays in dollars, someone carries the dollar to rupee movement. If the supplier quotes in dollars, it may have built in a rate assumption. If it quotes in rupees, the buyer carries the conversion.

The rate that matters is the one the supplier uses to convert its costs, not necessarily the published mid rate on the invoice date. A supplier buying metal in dollars and paying labour in rupees has a mixed exposure. A single exchange rate clause may not describe it accurately.

For a large programme, ask for the currency of the main cost inputs and the payment currency separately. That reveals whether the exposure is simple or layered. It also shows whether a hedge in one currency would actually reduce the risk.

A clause can also fix the conversion date. Invoice date, payment date and order date produce different numbers. The contract should name the source and the date, and say whether the rate is the mid rate or the bank's dealing rate. A bank spread can be a real cost on a large payment.

Hedging is a certainty purchase

A forward contract fixes a rate for a future date. It removes the downside and the upside. If the market moves in the buyer's favour, the buyer does not benefit beyond the contracted rate. That is the point: the hedge buys budget certainty.

The cost of the hedge is not always visible as a fee. It can sit in the forward rate, in a bank margin or in the supplier's price if the supplier hedges on the buyer's behalf. Include that cost in the landed cost, otherwise the comparison between a hedged and an unhedged quote is unfair.

Speculation is a different activity. A buyer that hedges more than its known exposure is taking a position. Keep the hedge linked to a documented order or forecast, and record the exposure it covers.

For a supplier that quotes in a foreign currency, the hedge may sit on the supplier's side. Ask whether the price includes a hedge and how it is renewed. A supplier that hedges a full year at once may offer a stable price but a wider spread than one that hedges each order.

Set a review cadence

A quotation is a snapshot, so the model needs a date and a review trigger. Put the rate basis, the metal reference and the validity end date on the quote. When any of them is close to expiry, review before the next release.

For a long programme, agree the cadence with the supplier: a monthly metal reset, a quarterly currency review and an annual labour review. That turns a series of price arguments into a predictable process, and it gives both sides a defensible record when a number changes.

The cadence should also cover the evidence. Each review needs the published reference, the rate source and the approved calculation. Without that record, a later invoice can be disputed even when the mechanism was agreed. Keep the review with the purchase order, not only in an email thread.

• Record the exchange rate and its source on every quote.
• State the metal reference, the averaging period and the premium.
• Agree what happens inside and outside the band.
• Keep the evidence for each adjustment with the purchase order.
• Review the mechanism when the product, route or currency changes.