Currency Adjustment Factor

Shippers favour an all-inclusive agreement that includes all costs incurred along with currency adjustments to offset the impact of fluctuating currency rates.

The purpose of the currency adjustment factor (CAF), which is a premium added to freight charges, is to take into consideration the volatility of the currency exchange rates between these nations.

To prevent carriers from having to face the negative effects of fluctuating currency rates on freight costs alone, CAF was created. In the end, CAF transfers the currency rate risk to the customers.

CAF Calculation

Currency pair, trade channel, and the carrier itself are just a few of the variables that affect how the currency adjustment factor is calculated. The carrier may impose a CAF fee that ranges from 1% to 10%. In extremely unpredictable market conditions or volatile currency scenarios, a carrier may charge CAF at a rate as high as 50%.

In the following two situations, the CAF is applicable:

• When the freight rates are not all-inclusive.
• At the carrier's discretion and request, following the conclusion of assessment and computation of final charges.

Ways to Avoid CAF

CAF is reliant on the specifications set out by the freight forwarder. To avoid CAF or, at the very least, manage it, there are two options:

• Strike a deal on "all-inclusive" freight charges: The majority of carriers include this in the ocean freight rate, but you can check the costs against those of other providers on the market. After that, you can engage in negotiations to safeguard the interests of both sides.
• Pay the fees in the selected currency: This means that you should pay the carrier fees in their local currency, which is typically US dollars. The local currency must be used to pay for any additional fees. This approach would necessitate a bank account and large local currency cash reserves.

There are, however, a number of fees that are additionally paid by the carrier in local currencies, usually for services provided at the point of origin or destination. Some exporters or importers may prefer to be billed in their home currencies. Carriers would levy a premium for the currency adjustment factor in these circumstances.

The CAF percentage is multiplied by the freight rate to determine the currency adjusted freight rate. Assume the cost of shipping a 40-foot container by sea from New York, New York, to Mumbai, India will be $3,000. Additionally, 5% CAF is charged by the freight forwarder for the shipment.

To calculate the currency adjusted freight rate, one would have to calculate as below:

Ocean Freight = $3,000.00

CAF (5.00%) = $150.00 ($3,000.00 x 0.05)

Currency Adjusted Freight Rate = $3,150.00  

One of the main issues with exports is the possibility of currency exchange rate fluctuations, which can result in losses for both exporters and buyers. Shipping companies add a fee known as CAF to the freight bill to minimise large losses. It is designed to fill in any gaps brought about by fluctuations in currency exchange rates.