What Is a Currency Adjustment Factor (CAF)?
A currency adjustment factor is an additional cost on trades between the United States and Pacific Rim countries.
Understanding Currency Adjustment Factors
The currency adjustment factor is applied in addition to the freight costs incurred during trades between these countries. It was enacted in response to the additional costs that shipping companies were incurring when they were dealing with exchange rates between the different currencies. The CAF is a percentage that is applied to fees, in addition to the base exchange rate. It is calculated based on the average of the exchange rate over the prior three months.
The currency adjustment factor increases in direct response to the United States dollar dropping in value.
Due to this charge, many carriers seek to enter into all-inclusive contracts that will include all possible charges that can be incurred to offset the impact of the exchange rate on profits. These issues most commonly occur on sea freight traveling between the U.S. and the Pacific Rim countries, but it can also be seen in other forms of shipments and with other countries outside of the U.S. and the Pacific Rim.
Example of a CAF
Consider an example of the currency adjustment factor being applied on a shipment between U.S.-based Onyx Technologies and Japan-based Nikita Corporation. Nikita has shipped Onyx a large shipment of silicon chips for Onyx to install into their digital cameras. Nikita is sending this delivery by steamer ship, and the name of the carrier service that runs these ships is Dermont Shipping.
Dermont Shipping specializes in these types of deliveries, and they are aware that the exchange rate between the U.S. dollar and the Japanese yen can be quite volatile. Not wanting to get caught in the middle of a devaluation of either currency, Dermont asks for the shipping contract to be all-inclusive, which means that there will be an adjustment built in to cover any drop in value. It works out in Dermont’s favor because, at the time of delivery, the adjusted fee would have included a 51 percent increase on top of what they were already paying, which means that half of their profits would have gone towards paying for the loss in currency value.
If Dermont had not requested an all-inclusive contract, either because they were not accustomed to shipping between these countries or because they wished to levy their own CAF against both parties, they would have needed to calculate their estimated fees in advance and written them into the contract. Otherwise, they would have had to pay those fees out of pocket.