Disbursements in Foreign Currency
The purpose of this policy is to provide guidance on the procedures to be followed to pay vendors in a foreign currency. These procedures have been established to ensure accurate and timely payment to foreign vendors that require payment in foreign currency.
Policy Details and Procedures
There are several methods available to process payment requests in a foreign currency. The following procedures have been established to identify the process that is required to pay foreign currency transactions for each of these methods.
Minimum Amounts to be Paid in a Foreign Currency
The University incurs significant transaction costs for making payments in a foreign currency.
Depending upon the size and timing of the foreign currency payment, one method of payment might be more appropriate than another. Generally speaking, it is more advantageous from a cost standpoint to use the Lehigh University OneCard, accounts payable check, or bank draft for smaller dollar payments (payments of less than $2,000). Wire transfers are processed by the Treasurer's Office and should only be used when payments via one of these other methods are not accepted or are not feasible.
Disbursement by Electronic Funds Transfer (Wire Transfer) in Foreign Currency
The department requesting payment must deliver a completed Accounts Payable Payment Approval Form and Foreign Wire Transfer Request Form (available from the Treasurer's Office) along with supporting documentation to Accounts Payable at least one week prior to the payment due date. This will provide sufficient time for the two-business day settlement period that is standard for purchasing foreign exchange. Exchange rate amounts paid using this method are determined at the “spot rate” (the precise time the payment is processed). Although we receive what we believe are favorable currency exchange rates from our primary bank, the price of a currency, like any commodity, is directly affected by supply-and-demand factors that are the result of economic, political, or monetary policy influences, and subject to continuous change.
The supporting documentation included with your request must include sufficient information to substantiate the amount and currency of the payment as well as the business purpose, the payee's name, address, and date and nature of the transaction. Required information including bank name, address and swift code, beneficiary account name, address, account number and/or other identifying information must be included. Absence of this information could delay processing of your payment.
A charge (currently $20) is assessed to the requestor's Banner account to partially offset the cost of the foreign wire transfer.
Disbursement by Bank Draft denominated in Foreign Currency
Foreign drafts are written orders (similar to a check) by which one party (the University) instructs another party (University's bank) to pay a specified sum to a third party payee in a foreign currency or in U.S. Dollars at a foreign location. Generally, foreign drafts are mailed by the requesting department so that the supporting documentation is attached and the correct address is used. Foreign drafts are appropriate for the following situations, among others:
- Small dollar invoices (generally < $2,000) from vendors requesting payment in a foreign currency.
- Seminar and conference registrations in foreign countries.
- University-related travel.
The Accounts Payable Supervisor can assist in determining if a foreign draft is the appropriate payment mechanism.
A department requesting payment by bank draft in a foreign currency must forward a completed Accounts Payable Payment Approval Form along with the appropriate supporting documentation to Accounts Payable. The payment request form must include the full name and address of the vendor to be paid, currency to be used for disbursement, the EXACT amount in the foreign currency, and Banner account information.
We advise that you allow 2-3 days for bank processing. A charge (currently $3.50) is assessed by the bank and charged to the department for this service. After being processed, the bank will send the Bank Draft to Accounts Payable who will notify the individual who prepared the request that the payment is ready for pickup (unless previously arranged with accounts payable to send it directly to the vendor).
Foreign Exchange Risk Management
The University has procedures in place to manage currency risks related to large planned expenditures (including those by Study Abroad Programs) and the purpose of this section is to advise you of these. The Director of Study Abroad will work with the Treasurer's Office to help identify the needs of the different international travel programs. For non-international studies and other University programs, the requesting department is required to follow the process below in working with the Treasurer's Office.
When a department becomes aware that it will be subject to foreign currency risk through the receipt or payment of foreign exchange, it should notify the Treasurer's Office and arrange to discuss how the risk can be reduced or avoided.
It is unlikely that most fluctuations in foreign exchange rates would create an unexpected burden on the University's (or Department's) overall finances. Departments are however required to ensure that any transactions which involve foreign currencies are fully assessed and budgeted before entering into any contractual (purchase) relationship. Any shortfall experienced as a result of currency changes will be charged to that department's funds. The University is committed to obtaining the best value relating to foreign currency transactions.
Hedging and Other Currency Risk Management
The University does not normally hedge against foreign currency transactions as a matter of general practice.
Where a specific transaction or group of transactions is to occur in a foreign currency and the amount of the transaction exceeds $100,000 USD, or there is some concern about currency fluctuations, the Assistant Treasurer should be advised and he may authorize the forward purchase of foreign currency or an alternative hedge.
Process for Foreign Exchange Risk Management
- The Treasurer's Office ("TO") is responsible for arranging all foreign exchange payments and receipts for the University. TO will coordinate the administration and management of foreign exchange transactions and foreign currency hedging contracts.
- The University's policy is not to speculate on future exchange rates but to use appropriate hedging products when appropriate to limit the University's exposure to foreign exchange risk. Hence the importance of early identification and planning for foreign exchange transactions by a department. The University will not commit to purchase foreign currency in excess of a specifically identifiable departmental need.
- Managing foreign exchange risk requires some knowledge about the hedging products that are available, an analysis of their costs compared with their benefits, and an assessment of the University's overall position with respect to foreign exchange transactions and tolerance for risk. It also involves choosing appropriate strategies from a range of products and advice.
- Where necessary, the TO will obtain foreign exchange management advice from the University's bankers. The TO in conjunction with appropriate departmental staff and the University's bankers will consider all alternative methods of hedging prior to entering into foreign exchange contracts or purchasing foreign currency.
- Departments will need to submit a request to the TO outlining the nature and, timing of the specific transaction as soon as the foreign exchange exposure has been identified. The minimum initial required transaction details are as follows:
- Date(s) of foreign business transaction(s),
- Amount(s) of foreign business transaction(s),
- Currency of foreign business transaction(s),
- Business purpose of transaction(s),
- Party(ies) that will be paid by foreign business transaction(s),
- Banner account code to charge for foreign business transaction(s),
- Percentage to be hedged. (It is recommended to hedge 65% to 85% of the total amount of the foreign expenses, based upon the structure of the program, unless an exact amount needed is known. Not hedging 100% allows a department to remain somewhat flexible for cancellations or changes in payment contracts. However, hedge percentages higher or lower than the recommended range will be considered based upon request.)
- Any transaction costs associated with a foreign exchange transaction will be bourn by the requesting department. Should a foreign exchange hedging program transaction need to be cancelled prior to taking delivery of the foreign currency, the department will be responsible for all residual transaction costs.
- Prior to requesting the TO enter into a foreign exchange arrangement, departments should consider the option of early payment of invoices. This means that they can take advantage of current spot rates, thus avoiding the purchase of foreign exchange contracts altogether. Another option departments could explore as part of early payments is the availability of discounts on contracted amounts.
Information and Questions
If you have any questions about this policy, contact the Office of Finance & Administration at 8.3180.