Currency: Overview, definition, and example
What is currency?
Currency is a system of money used as a medium of exchange in a particular country or region. It serves as a unit of account, a store of value, and a means for conducting transactions. Examples of currency include the US Dollar (USD), Euro (EUR), and Japanese Yen (JPY).
In business contracts, currency often refers to the specific type of money agreed upon for payments, ensuring both parties understand how obligations will be fulfilled.
Why is currency important?
Currency is crucial in contracts and financial transactions as it sets the standard for payments. For businesses engaged in international trade, specifying the currency helps avoid confusion and fluctuations caused by exchange rates.
Choosing a currency in contracts also affects costs, revenue predictability, and the risk of foreign exchange losses. By agreeing on a currency upfront, businesses can plan finances more effectively and minimize disputes.
Understanding currency through an example
Imagine a US-based business purchasing raw materials from a supplier in Japan. The contract specifies that payments will be made in Japanese Yen (JPY). This means the buyer must convert US Dollars (USD) into Yen when making payments. If the exchange rate fluctuates, the cost of the transaction in USD could change, but the agreement in JPY remains fixed.
In another scenario, a European company exporting goods to the United States specifies payments in Euros (EUR) in its contract. This shifts the currency conversion responsibility to the US buyer, who must pay the agreed amount in Euros, regardless of USD fluctuations.
An example of a currency clause
Here’s an example of how a currency clause might appear in a contract:
“All payments under this Agreement shall be made in [Insert Currency], and the Parties agree that no other currency shall be accepted for fulfillment of payment obligations.”
Conclusion
Currency plays a vital role in business contracts and transactions, providing clarity and consistency for payments. It helps businesses manage financial planning, reduce disputes, and address exchange rate risks in international agreements.
By specifying the currency in contracts, businesses ensure transparency and protect both parties from potential misunderstandings, making it a critical element in financial agreements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.