An exporter selling in foreign currency carries two risks that everything in its organization pushes it to conflate: that of not being paid, and that of being paid in a currency that has fallen. They look alike because they produce the same symptom, receipts below budget, and they have nothing in common. The first is insured, the second is hedged on a financial market, and credit insurance does not cover the second. Saying so plainly avoids the trade's commonest disappointment: that of the insured which, indemnified at ninety-five percent of a receivable, finds it has recovered appreciably less than it expected in euros.
The gap arises because the indemnity is computed in the currency of the receivable. A policy covers an invoice, and that invoice is denominated in the contract currency: the insurer owes what it covered, in that currency, and conversion into euros is made at a rate and on a date the insurance contract fixes. If that rate is the settlement day's and not the sale day's, all the currency movement between the two stays with the insured. That applicable-rate clause is one line long, it does not stand out on reading, and on a long receivable it weighs more than the coverage share that will have been argued over at length.
It must be added that the loss itself tends to occur at the worst possible moment for the exchange rate. A country rationing its currency, restructuring its debt or undergoing a political crisis ordinarily sees its currency depreciate, and it is the same crisis that causes the non-payment. The two risks, presented as independent in textbooks, are therefore correlated in practice and correlated in the direction unfavourable to the insured: default arrives when the currency is low. An exporter that invoiced in local currency to ease the sale then discovers it has added the two exposures instead of splitting them.
The practical consequence is that the choice of invoicing currency is an exposure decision and not a commercial convenience. Invoicing in a hard currency transfers exchange risk to the buyer, which has a commercial cost and sometimes a perverse effect: a buyer that must obtain foreign currency becomes dependent on an administrative authorization, which moves the problem toward non-transfer rather than removing it. Invoicing in local currency removes that dependence and brings exchange risk home to the seller. Neither solution is good in itself, and the choice is made knowing which of the two risks one prefers to carry, which presupposes knowing which one can be hedged.
Then comes a technical difficulty treasuries know well and salespeople ignore: a standard currency hedge assumes a certain flow on a certain date. Yet an insured export receivable is uncertain on both counts, in its amount, since a loss returns only a coverage share, and in its date, since an indemnity arrives after a waiting period and a review. A hedge set on the contractual maturity finds itself without an underlying the day the buyer does not pay, and unwinding it then produces a loss of its own, independent of the receivable. That is the classic trap of the hedge that outlives what it was hedging.
There are ways of handling this mismatch and they are decided before the loss. An open-maturity or split hedge absorbs part of the date uncertainty. The amount is hedged up to the share actually covered rather than the whole invoice, which leaves the retained share exposed but avoids hedging what will never be collected. And above all, the policy's applicable-rate clause is read before signature, because it determines what is left to hedge: depending on whether it adopts the sale day's rate, the maturity's or the settlement's, the residual exposure changes nature and sometimes disappears.
What is retained is a clean separation and three checks. Non-payment and exchange are two distinct risks carried by two different markets, and no credit insurance policy does a currency hedge's work. One therefore verifies, in this order, the invoicing currency and what it transfers, the applicable-rate clause and the date it adopts, then the consistency between the financial hedge's maturity and the real timetable of an indemnification. An exporter that has made those three readings knows what it will carry in euros; one that has not discovers it at settlement, when neither decision can be taken again.
A French exporter sells the equivalent of 3 million euros to a South American buyer, invoiced in local currency at the buyer's request, payable at one hundred and eighty days. Treasury puts in place a forward sale of the currency at the contractual maturity. The buyer does not pay: its central bank introduced currency rationing in April, and the local currency has lost 22 percent since invoicing. The policy covers 90 percent of the receivable and provides for conversion at the rate on the day the indemnity is settled. The indemnity is paid eleven months after the sale. What does the exporter actually recover, and what should have been decided?
Three losses compound and only one is the loss the exporter thought it was carrying. The first is the uncovered share, ten percent, which is the known price of the coverage share. The second is not insurable and was not seen: with the indemnity converted at the rate on the settlement day, eleven months after the sale, the 22 percent depreciation stays wholly with the exporter on the entire receivable, the covered share included. That line of the contract weighs more here than the coverage share that will have been argued over. The third comes from the hedge itself: the forward sale was set on the contractual maturity, the buyer did not pay, and there was no underlying at unwinding. Treasury therefore had to deliver a currency it had not received, producing a loss of its own, independent of the claim and covered by nobody. The correction is not to be sought on the insurance side, which did what it promised. It rests on three earlier decisions: read the applicable-rate clause before signing, since it and not the coverage share decides what stays exposed; hedge the share actually covered rather than the whole invoice; and set the hedge on the real timetable of an indemnification, waiting period and review included, rather than on a contractual maturity that only means something if the buyer pays.
- 01Non-payment and exchange are two distinct risks carried by two markets: no credit insurance policy does a currency hedge's work.
- 02The indemnity is computed in the receivable's currency, and the applicable-rate clause decides what stays with the insured in euros.
- 03The two risks are correlated the wrong way: the crisis causing non-payment is the one driving the currency down.
- 04A hedge set on the contractual maturity outlives the receivable when the buyer does not pay, and unwinding it produces a loss of its own.
- 05The choice of invoicing currency is an exposure decision: invoicing in hard currency does not remove the risk, it moves it toward non-transfer.