Currency adjustment factor

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A currency adjustment factor (CAF) is a fee placed on top of freighting charges for carrier companies developed to account for constantly changing exchange rates between the dollar and other currencies. Its goal is to offset any losses from fluctuating exchange rates for carriers. [1] Calculation basis and methodology may vary from carrier to carrier.

Overview

People's Bank of China Headquarters in Beijing People's Bank of China Headquarter, Beijing.jpg
People's Bank of China Headquarters in Beijing

The CAF increases as the US dollar decreases. It is applied as a percentage on top of the base exchange rate, which is calculated as the average exchange rate for the previous three months. Due to this added charge, shippers tend to enter into "all inclusive" contracts at one price that accounts for all applicable charges, to limit the effect of the CAF. [2] In 2005, the CAF charged on shipments to Japan was 51%. [1]

On 21 July 2005, the People’s Bank of China announced that it would no longer peg the Chinese currency (renminbi or RMB) to the United States dollar (USD). In response a number of international freight forwarders decided to convert all their contracts with their customers into renminbi and to introduce a CAF surcharge. [3] The freight businesses agreed to set the CAF amount; the European Commission held that this agreement between competing companies amounted to a cartel and fined the businesses in 2012; this decision and decisions regarding a number of other freight cartels were upheld by the Court of Justice of the European Union on 1 February 2018. [4]

Related Research Articles

A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a system of money in common use within a specific environment over time, especially for people in a nation state. Under this definition, the British Pound sterling (£), euros (€), Japanese yen (¥), and U.S. dollars (US$) are examples of (government-issued) fiat currencies. Currencies may act as stores of value and be traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are either chosen by users or decreed by governments, and each type has limited boundaries of acceptance; i.e., legal tender laws may require a particular unit of account for payments to government agencies.

Special drawing rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). SDRs are units of account for the IMF, and not a currency per se. They represent a claim to currency held by IMF member countries for which they may be exchanged. SDRs were created in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and U.S. dollars. The ISO 4217 currency code for special drawing rights is XDR and the numeric code is 960.

<span class="mw-page-title-main">Renminbi</span> Currency of China

The renminbi is the official currency of the People's Republic of China. It is the world's 5th most traded currency as of April 2022.

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<span class="mw-page-title-main">Exchange rate</span> Rate at which one currency will be exchanged for another

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<span class="mw-page-title-main">Balance of payments</span> Difference between the inflow and outflow of money to a country at a given time

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<span class="mw-page-title-main">Foreign exchange market</span> Global decentralized trading of international currencies

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<span class="mw-page-title-main">Dynamic currency conversion</span> Foreign exchange process

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Central bank liquidity swap is a type of currency swap used by a country's central bank to provide liquidity of its currency to another country's central bank. In a liquidity swap, the lending central bank uses its currency to buy the currency of another borrowing central bank at the market exchange rate, and agrees to sell the borrower's currency back at a rate that reflects the interest accrued on the loan. The borrower's currency serves as collateral.

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<span class="mw-page-title-main">Renminbi currency value</span> Value of the currency of China

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<span class="mw-page-title-main">International use of the U.S. dollar</span> Use of US dollars around the world

The United States dollar was established as the world's foremost reserve currency by the Bretton Woods Agreement of 1944. It claimed this status from sterling after the devastation of two world wars and the massive spending of the United Kingdom's gold reserves. Despite all links to gold being severed in 1971, the dollar continues to be the world's foremost reserve currency. Furthermore, the Bretton Woods Agreement also set up the global post-war monetary system by setting up rules, institutions and procedures for conducting international trade and accessing the global capital markets using the US dollar.

Since the late-2000s, the People's Republic of China (PRC) has sought to internationalize its official currency, the Renminbi (RMB). RMB internationalization accelerated in 2009 when China established the dim sum bond market and expanded Cross-Border Trade RMB Settlement Pilot Project, which helps establish pools of offshore RMB liquidity. The RMB was the 8th-most-traded currency in the world in 2013 and the 7th-most-traded in early 2014. By the end of 2014, RMB ranked 5th as the most traded currency, according to SWIFT's report, at 2.2% of SWIFT payment behind JPY (2.7%), GBP (7.9%), EUR (28.3%) and USD (44.6%). In February 2015, RMB became the second most used currency for trade and services, and reached the ninth position in forex trading. The RMB Qualified Foreign Institutional Investor (RQFII) quotas were also extended to five other countries — the UK, Singapore, France, Korea, Germany, and Canada, each with the quotas of ¥80 billion except Canada and Singapore (¥50bn). Previously, only Hong Kong was allowed, with a ¥270 billion quota.

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References

  1. 1 2 "Currency Adjustment Factor - CAF". Academic Dictionaries and Encyclopedias. Archived from the original on 2016-03-04.
  2. "Currency Adjustment Factor". Global Forwarding. May 21, 2012. Archived from the original on Dec 1, 2023.
  3. "Automated Trading, Robust Risk Management, Backtesting and Optimization" . Retrieved 2024-06-01.
  4. Court of Justice of the European Union, "The Court of Justice upholds the fines imposed by the Commission on a number of companies for their participation in cartels in the international air freight forwarding services sector", Press Release 09/18, published 1 February 2018, accessed 19 January 2022.