What it means
Currency codes follow an international standard in which the first two letters identify the country and the third letter the currency, so CZ for the Czech Republic and K for koruna. Using the code in contracts and invoices avoids confusion between currencies that share a name, such as the many dollars and crowns around the world.
CZK is the code you would see on a bank statement, a price list or a foreign exchange screen. The koruna floats against other major currencies, meaning its value is set by supply and demand in the foreign exchange market rather than being fixed.
Interest rates set by the central bank, inflation, trade flows and investor sentiment all influence it. As a result, the amount of dollars that a given CZK invoice is worth changes between the day it is raised and the day it is paid.
For a company outside the country, there are two main exposures. If you sell in CZK, a weaker koruna means each CZK received converts into fewer dollars; if you buy in CZK, a stronger koruna makes your costs higher.
This is called transaction exposure, and it is the first thing a finance team should measure. There are standard ways to manage the risk.
A business can invoice in its own currency and pass the risk to the customer, hold CZK bank balances to match CZK payments, or use forward contracts to fix the rate for a future date. Natural hedging, such as spending CZK revenue on CZK costs, is usually the cheapest approach.
The nuance is that quoted exchange rates are not the rates you actually get. Banks and payment providers add a margin to the market rate, and the gap between buying and selling rates can be meaningful on smaller transactions.
Comparing providers on the all-in cost of conversion is worth the effort for regular payments.
In practice
Real-world examples.
Example
A German machine tool maker sells equipment to a Czech factory and invoices in CZK to win the order. The finance team buys a forward contract to fix the euro value of the payment, so the sales margin is not eroded by currency moves before the customer pays.
Example
A US e-commerce brand sells in the Czech market through an online marketplace that pays out in CZK. The brand keeps the CZK in a local account to pay its Czech warehouse, converting only the surplus to dollars each quarter.
Example
A hotel group with a property in Prague reports in dollars. Its consolidated accounts translate the hotel's CZK profit at average rates for the income statement and at the period-end rate for the balance sheet, which creates a translation difference in equity.
Formula
Calculation
Dollar value = amount in CZK / exchange rate (CZK per $1)
Suppose a US importer agrees to pay a Czech supplier 2,400,000 CZK in 60 days, and the exchange rate when the contract is signed is assumed to be 24 CZK per $1. The expected cost is 2,400,000 / 24 = $100,000. If the koruna weakens to 25 CZK per $1 by payment day, the cost is 2,400,000 / 25 = $96,000, a saving of $4,000. If it strengthens to 23 CZK per $1, the cost is 2,400,000 / 23 = $104,347.83, which is $4,347.83 more than planned.Case study
Seen in the real world.
Northgate Components is an illustrative, fictional US maker of electronic parts that buys circuit boards from a supplier in the Czech Republic. All its purchase orders were priced in CZK, and the buyer never thought about the exchange rate.
Over one year the koruna strengthened against the dollar, and the finance manager noticed that gross margin had dropped by nearly two points even though supplier prices in CZK had not changed. A review showed that the company had roughly 1,200,000 CZK of payments falling due each month with no hedge in place.
The company started to place forward contracts covering six months of expected payments and renegotiated part of its supplier contracts into dollars. The illustrative lesson is that a price that is stable in one currency can still be volatile in another.
Watch out
Common mistakes.
- Assuming a supplier's CZK price is a fixed dollar cost, when the dollar value changes every day with the exchange rate.
- Using the mid-market rate from a news site to budget, when the rate your bank or payment provider actually applies includes a margin.
- Hedging the whole forecast amount regardless of certainty, which can leave a company over-hedged if orders are cancelled.
Questions
People also ask.
How is CZK divided?
One koruna is divided into 100 haler, although in practice haler coins are no longer in everyday use, so prices are rounded.
Who sets the value of CZK?
The market sets it through supply and demand, while the Czech National Bank influences it through interest rates and, occasionally, intervention.
Should I invoice in CZK or in my own currency?
Invoicing in your own currency transfers the exchange risk to the customer, but it can make you less competitive, so many firms agree a currency based on negotiating strength and hedging cost.
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