Generally consultants, capital good exporters and contractors of civil engineering projects receive their payments spread over a considerable period of time. This happens due to their nature of work or service they provide. If the service is rendered to foreign countries then the payment is made in foreign currency whose exchange rate fluctuates frequently. Such deferred payments are always at risk of exchange fluctuation.
Exchange Fluctuation Risk Cover provides coverage against exchange fluctuation.
What does the policy offer?
The policy can be taken for payments which are planned for a time frame of over 12 months and up to 15 years. From the bidding date to payment of final installment - the cover can be taken for the entire period.
How the policy works?
At the initial stage when bidding is done the exporter or contractor can acquire the Exchange Fluctuation Risk Cover. For taking the cover a reference rate has to be fixed. Normally the existing rate or a rate approximately close to it is set as the reference rate. This reference rate forms the basis of the cover. Initially the cover is given for 12 months but it can be extended depending on the situation.
If the contractor wins the bid, he is supposed to take the Exchange Fluctuation (Contract) cover for all the payments that will be due for the project. Here again a reference rate has to be set. The contractor can select either the existing rate of exchange or the reference rate used in bid cover.
In case the bid fails, the contractor will get back 75% of the premium that he paid under the Exchange Fluctuation Risk Cover.