Transshipment and the USD Exposure: How to Guard and Hedge It

Transshipment has one characteristic that no other trading model has: the margin is thin, but the exposure is not necessarily thin.

Goods owned offshore, channel onshore, settlement in US dollars — this is the typical structure of transshipment. The profit comes from the channel and the timing arbitrage, and it is usually only 1% to 3%. At the same time, the company is holding a net dollar position many times the size of that profit, and it has to carry that position across the whole payment term.

That produces a very dangerous combination: a 2% net margin against a 2% currency move is zero profit; against 3%, it is a loss. And currency volatility correlates strongly with trade volume, term length and dollar liquidity cycles — this is not something you can dodge by being lucky.

What the exposure looks like: two mismatches stacked on top of each other

The currency exposure in transshipment is not a single source. It is the product of two mismatches.

Mismatch one: the payment currencies do not match

The typical structure is the overseas seller receives dollars and the domestic buyer pays RMB. One cash flow in and one cash flow out, in two different currencies — that forms a net dollar position.

Note the nature of this. It is not an investment position that "might lose or might gain". It is an exposure that arises necessarily from the business itself. It travels with the goods — as long as this business is running, this exposure is there.

More importantly, it is usually one-directional. Transshipment receives dollars and pays RMB, so the net position is almost always net long USD. That means when the dollar weakens against RMB, the company is necessarily the losing side. There is no "hedge it and it is fine" — unless it hedges actively, or changes the payment structure.

Mismatch two: the length of the payment term

The dollar receivable and the RMB payable in transshipment usually do not fall on the same day. From paying for the goods first to collecting the dollars, 30 to 180 days is common.

That means the shape of the exposure is not a number at one point in time, but a continuous exposure that changes every day of the term. Today's exposure is USD 5 million; in 60 days it may be USD 8 million, or it may be USD 3 million because of a new deal.

This creates a very practical difficulty: it is hard to know precisely how much to hedge. An imprecise hedge is no hedge — lock too little and you run naked, lock too much and it turns into speculation.

Why the loss shows up "suddenly"

Currency losses in transshipment have one feature: they usually do not surface day by day, they surface in one concentrated hit on a single day.

The reason is the settlement cycle. If the company collects in monthly or quarterly batches, currency movement inside the period does not show up. It shows up at the settlement date, all at once, as a single exchange gain or loss.

At that moment, if the books already show a loss and the period is psychologically "hard to explain", two mistakes are common: first, delaying recognition and filling the hole with later months' operations; second, raising the bet after the loss in an attempt to win it back. Both turn a controllable operating loss into an uncontrollable risk exposure.

Three layers of defence: the order cannot be reversed

Layer 1 · Natural hedge: shrink the exposure first

The most effective hedge is not creating the exposure in the first place.

Concretely: switch the purchasing side to dollar pricing as well. Receive dollars, pay dollars, and the net exposure naturally approaches zero. This is entirely feasible when the overseas supplier is willing and able to pay in USD, and it costs almost nothing — no credit line used, no premium paid, no margin tied up.

This step should always come first. It needs no instrument and no approval, only a change of currency in the contract terms.

If it cannot be done (say the overseas supplier only accepts RMB), then move down to the second layer — but be clear on one thing: the part natural hedging cannot cover is the part that genuinely needs instruments, and that number has to be calculated, not covered by a vague "lock a bit of everything".

Layer 2 · Derivatives: control what is left

Only the net exposure remaining after natural hedging is handed to derivatives.

The choice is simple, and it depends on two questions: is the amount certain? Is the timing certain?

• Amount and timing both certain: use forwards. This is the lowest-cost, highest-certainty route. The drawback is that you give up the extra gain if the rate moves your way, and it ties up credit line and margin.
• Amount certain, timing uncertain: use a forward combination or batched forwards, rolling against the proportion already locked.
• Amount uncertain but material: use options. Buy dollar puts to lock the downside, and keep the gain if the dollar rises. The cost is the premium.
• Amount and timing both uncertain: handle it in layers — split by certainty into tiers, and use a different instrument and a different ratio for each tier.

For most transshipment companies the realistic answer is layered hedging: neither "lock everything" nor "lock nothing", but layering by the certainty of the exposure, keeping cost inside an acceptable range while capping the maximum loss.

Layer 3 · Institutional constraint: stop the first two layers failing when people relax

However good the plan, without an institutional constraint it will be bypassed at some point when a rush order comes in. So the rules must state three things:

1. Hedge ratio: for each class of exposure, the minimum to lock and the maximum to lock. The upper limit matters just as much — over-hedging turns hedging into speculation.
2. Authority and timing: who may decide to hedge, and inside which window. Currency moves most violently exactly when the business is busiest and shortest of hands — if that moment has no preset rule, it is the moment the exposure is most likely to run away.
3. Review cadence: monthly, look at the deviation between actual currency result and expectation; quarterly, re-estimate the hedge ratios. This is not to appraise the trader. It keeps the ratios matched to the current exposure structure.

Three traps you must avoid

Trap one: hedging for hedging's sake, turning a hedge into speculation

The typical scene: a business unit sees the currency about to fall and asks to "lock a bit more". It sounds responsible, in practice it is an authority overrun — because the business unit looks at its own orders, not at the company's net dollar position.

The result is that net exposure moves from +USD 5 million to −USD 3 million (net short USD), and the company goes from "the party hurt by the currency" to "the party helped by the currency". If the currency then rebounds, the loss is the company's own.

There is only one defence: hedging decisions must be based on net exposure, not on the judgement of a single deal.

Trap two: locking the currency but nothing beyond it

Many transshipment companies take currency hedging very seriously and leave the commodity price exposure completely unmanaged.

The result: currency movement is locked and the profit looks stable; but once the price exposure on the goods goes wrong, the original 2% margin is lost anyway. Currency hedging has only moved the risk from "currency" to "price". It has not removed the risk.

Trap three: ignoring the cost of capital, giving back the currency loss you saved

Forwards and options both tie up credit line and margin. That capital has a cost.

If the hedging gain is 1.5% while the margin funding cost plus the option premium is 1.2%, then the net contribution of the whole operation is only 0.3% — and that 0.3% may not cover its own management cost.

So every currency hedging proposal should carry a net return calculation: locked gain − premium − funding cost − management cost = actual contribution. A proposal that does not compute is a proposal that should be redesigned, however professional it looks.

A selection table

A self-check you can run today

1. What is your net dollar position right now? Net long or net short? Is that number updated daily, or do you only learn it at the quarterly settlement?
2. Over the last 12 months, what share of your full-year net profit came from exchange gains and losses? If it is above 20%, you are effectively running the currency as your main business without noticing.
3. Can the purchasing side switch to dollar pricing? If not, where does the obstacle sit — the business, finance, or the overseas supplier?

Of these three questions, the first is the most urgent. Many transshipment companies have done currency hedging for years and yet never kept a live net dollar position table — if you do not know what you are betting on, you cannot manage it.

Data sources and notes

The transshipment currency exposure structure analysis and the three-layer defence framework used in this article are common methods in RMC's diagnostic and advisory work for cross-border trading, re-export trading and supply chain finance companies. The figures are anonymised constructions of typical situations and do not represent the operating data of any specific company. Companies can reconstruct the same view from their own contract and accounting data using the same method. This article does not constitute a recommendation for or an evaluation of any specific software product.