Currency certificate helps to reduce risk of changes in exchange rate. It gives the right to exchange certain sum of currency to another currency on pre-determined exchange rate, usually up to certain date. Nowadays, currency is one of the best tools for exchanging one product for another. The certificate does not indicate the owner, so it can be selled.
The currency certificate is usually used in international trade, when the company wants to buy goods in another country, but with minimal exchange rate risk. The organization which wants to use currency certificates for risk management should buy them regularly, when the price is low enough. In such case the certificates may be used in future international trade situations.
This certificate give the holder possibility to exchange one currency to the another, but the holder do not have to do it. This document guarantees that the transaction will be made in accordance with the data on the document, even the rate is higher. The currency is used in a versatile way. Currency certificates are helpful when company must pay invoice in the another country in the certain time. Then company can buy certificate earlier for given amount and secure that invoice. Firms also use foreign currency derivatives for saving their business from exange – rates movements (Hentschel and Kothari, 1997).
According to Hooper and Kohlhagen (1978) we can also said that trade flows are depends to exchange risk. It means that when exchange risk is higher the trade flows are lower. When companies make frequently foreign transactions, use certificates allows to reduce costs. The certificates can be used in case of devaluation of home currency and final goods abroad (Itagaki, 1981). It is also worth noting that changes in the exchange rate affect on the value of companies. The goodwill is changes when value of revenues or value of purchased good changes (Allayannis and Ofek, 1997). It means that certificate with a low and permanent currency is very important for the company.
Propositions of international payments
Nowadays there are many propositions of methods that allows exchanging currencies at a favorable rate. One of them is the possibility of making Internet payments based on the verification of the geographical region. The main task of this type of payment is to integrate electronic payments for the global banking network and accounting infrastructure. During the transaction, the new currency is insured and then currency server creates a key which allows to create and manage currency. Based on this key a financial institution can recognize currency certificate as a legal payment.
- Allayanis G., Ofek E.(1997). rate exposure, hedging, and the use of foreign currency derivatives. Journal of International Money and Finance 20(2), 273-296.
- Cushman, D. O. (1985). Real exchange rate risk, expectations, and the level of direct investment. The Review of Economics and Statistics, 297-308.
- Medvinsky G, Neuman C. (1993). NetCash: for practical eletronic currency on the Internet. Published in: Proceeding CCS'93 Proceedings of the 1st ACM conference on Computer and cominications security, 102-106.
Author: Joanna Kruk