The Turkish Lira fell to a record low in late 2021 due to controversial interest rate cuts. The year witnessed a 45% drop in the value of the currency, with a historic 15% decline on Nov 23.
With inflation at its peak, goods priced in local currency were being sold at steep discounts. And so, Turks rushed to stores to buy valuable electronic goods such as Apple products as investments, since they’ll likely find a good resale value for them in the future.
The situation in Turkey became so dire that Apple decided to halt the sale of its products in the country altogether, with buyers receiving error messages on its website. Sales resumed a few days later with significantly higher prices.
You see, the extreme devaluation of the Turkish Lira was causing Apple to lose money by selling its products at the prevailing rate in the Turkish market.
Is there a way companies can secure themselves against local currency devaluations?
This kind of risk is covered with the help of Foreign Exchange Risk Insurance.
Under a Foreign Exchange Risk Insurance policy, the insurance company guarantees an exporter or importer a specific forward exchange rate, which locks in the exchange rate on a specific date. This ensures a fixed sale price regardless of the fluctuations in the currency - this price can be higher or lower than the rate prevailing on the day of the actual sale.
After the export/import is complete, the insurance company comes in to settle any exchange rate losses or gains with the business. In the event of foreign exchange loss, the business receives compensation from the insurer, and in the event of foreign exchange gain, the business is required to return the amount of profit to the insurer.
What’s interesting is that in case no transaction takes place, the Foreign Exchange Risk Insurance policy will simply expire with no further obligations for the business.
This kind of a policy allows exporters and importers to enter advanced deals in the local currency without bearing the risk that comes with it.