Other Types of Payments in Forex
There is a whole range of payments that are more variable in timing: service payments, royalties, dividends, capital investments, loans, loan repayments, and so forth. In all of these the timing of payment is much more flexible but the exchange risk still exists, and in terms of one currency or another it has an important bearing on the transaction.
Take as an example, a U.S. company that has an investment in a German affiliate. In July 1969 the German affiliate declares a dividend, of which the portion payable to the U.S. investor is DM 100,000. If payment is made in July, the U.S. investor receives $25,2000; but if payment is delayed until November, the U.S. investor receives $27,100 because the deutsche mark has been revalued upward in the meantime.
That is a difference of $1,900, as far as the U.S. investor is concerned. There is no impact on the German company, since the deutsche mark amount remains the same.
Now look at it the other way around. A German company has an investment in a U.S. company. In July 1969 the U.S. company declares a dividend of which the portion payable to the German investor is $100,000. Now, if the German investor receives payment in July, it receives DM 397,000, whereas if it receives payment in November, the amount is only DM 369,000, a difference of DM 28,000.
In this case, there is no effect on the U.S. company, since the dollar amount remains the same. The possible change in equivalent value of dividends is equally true of all the other types of payments referred to.
Leaving aside for the moment the question of whether such payments can or should be covered by forward transactions, we may express a general rule: payments to be received that are denominated in stronger currencies should be deferred when there is a risk of change of one currency against the other.
Payments to be made that are denominated in strong currencies should be expedited under the same circumstances. The converse is that payments to be received that are denominated in weak currencies should be expedited and payment to be made should be deferred.
It is generally not too difficult to make an evaluation of one currency against one other. A revaluation of the German mark had the same effect as a devaluation of all the other currencies, including the U.S. dollar against the mark.
The devaluation of the French franc had the same effect as a revaluation of all the other currencies, so that consideration should be given to the relative currency value changes and not necessarily the type. It is not, of course, possible to defer payments indefinitely or advance them at will. There are the usual business reasons why they may be required at a particular time.