What it means
The word franc covers a family of unrelated currencies that share a name from history. The Swiss franc, with the international code CHF, is the best known and is one of the main currencies used in global finance.
The CFA francs, used by countries in West and Central Africa, have their own codes and are linked to the euro at a fixed rate. The old French and Belgian francs ended when those countries switched to the euro.
Some other countries, such as Rwanda, Burundi and Djibouti, also have their own national francs. The letter F is sometimes used as a symbol or in short form, but it is not an official code, so reports should use the three-letter code to avoid mistakes.
The Swiss franc has a reputation as a safe-haven currency. In times of financial stress, investors often buy it because Switzerland has a stable political system, low inflation and a strong current account.
This can push up its value at moments when other markets are falling, which affects exporters and investors who hold Swiss assets. For businesses, the key issue is exchange rate exposure.
A company that sells goods into Switzerland and invoices in francs will see its dollar income change as the rate moves, and one that borrows in francs can find its debt rising in dollar terms if the franc strengthens. Treasury teams often hedge such exposures with forward contracts.
The CFA francs are different because they are pegged to the euro, which means their value against the dollar follows the euro. A business in the region can price in a stable relationship to the euro, but its dollar costs still move whenever the euro moves.
Always ask which franc is meant and check its current rate from a reliable source.
In practice
Real-world examples.
Example
A US watch retailer buys stock from a Swiss maker and is invoiced in francs. The finance director hedges the next six months of payments with forward contracts. The company can then price its watches without worrying about the franc.
Example
An investor in a global fund notices that the Swiss franc rose during a period of market turmoil. The fund holds francs as a defensive position, and the gain helps to offset losses elsewhere in the portfolio. The manager keeps the position under review.
Example
A mining company has a subsidiary in West Africa that sells to local customers in CFA francs. The group accountant translates the subsidiary's profits into dollars each month using the euro-linked rate. Changes in the euro against the dollar therefore flow into the group's results.
Formula
Calculation
Dollar value = Amount in francs x Exchange rate (dollars per franc)
Suppose, purely for illustration, that one Swiss franc is worth $1.10. An invoice for 10,000 francs is worth 10,000 x 1.10 = $11,000.
If the franc strengthens to $1.20, the same invoice is worth 10,000 x 1.20 = $12,000. A company that has to pay 10,000 francs would then pay an extra $1,000, which is an increase of 1,000 / 11,000 = about 9.1% in its dollar cost.Case study
Seen in the real world.
Alpine Components is a fictional US distributor that buys precision parts from a Swiss supplier. Each quarter it pays 500,000 francs, and it had never hedged the exposure.
In one quarter the franc rose from $1.10 to $1.18. The payment cost 500,000 x 1.18 = $590,000 instead of 500,000 x 1.10 = $550,000, an extra $40,000 that wiped out most of the quarter's profit on the product line.
In this illustrative example the finance manager began buying francs forward three months ahead of each payment. The forward cover cost a small premium each quarter, but the company's costs became stable and the board no longer saw surprises in its margins.
Watch out
Common mistakes.
- Assuming all francs are the same currency, when the Swiss franc, CFA francs and other national francs have different values.
- Using the letter F as if it were an official currency code, instead of the three-letter code such as CHF.
- Using an old rate for a historic French or Belgian franc without converting at the fixed euro rate set when those currencies ended.
Questions
People also ask.
Which currencies are called francs?
They include the Swiss franc, the CFA francs used in parts of Africa, and several other national francs, as well as the former French and Belgian francs.
Why is the Swiss franc called a safe-haven currency?
Investors buy it in times of stress because of Switzerland's stability and low inflation, which can raise its value when other markets fall.
How should a company manage franc exposure?
It can invoice in its own currency, match francs received with francs paid, or use forward contracts to fix the rate in advance.
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