Being on the receiving end of an undesirable exchange rate can be detrimental to any type of international transfer, no matter the size or destination country, but it is especially damaging to international business transfers that make regular mass payments. Foreign exchange risk, or FX risk, derives from the exposure of an organisation during international transactions in a foreign currency. This guide will help any company or business understand key risks and mitigate potential loss of assets.
Put simply, foreign exchange risk refers to the chance that an investment’s value could decrease due to changes in currency exchange rates.
When dealing with foreign currencies, business owners often tap into currency forecasts to anticipate potential market fluctuations, but it is no easy task. Regardless of the size of your business venture, understanding and mitigating foreign exchange risk should be a high priority when planning for successful cross-border transactions.
Foreign exchange risk can impact the financial positioning of a business and there is the potential for risk whenever a business deals with currency conversion. This is because the rate could change between the time of the transaction and the time the payment has been received and converted into local currency.
Companies that make mass international payments for business – to pay foreign suppliers, contractors or employees – are most vulnerable to substantial foreign exchange risk.
Investors, who engage in international trading in multiple countries, may also be affected as their financial transactions will be denominated in a currency other than the local currency where the investor or business is based.
Next we will run through the three main types of risk experienced by business owners or investors.
Companies counter the risk of market fluctuations affecting their international transfers and payments by adopting the following foreign exchange instruments:
Foreign exchange risk poses a very real threat to the value of international business transfers, as outlined in the scenarios on this page. With our help, you can save yourself money and stress, by familiarising yourself with the possible outcomes and implementing the recommended tools detailed in this guide. We strive to equip our readers with a range of money management and FX trading skills; find out what else you can learn from our other Sending Money guides today.
Elliott is a former investment banker with a 20 year career in the city of London.
During this time he held senior roles at ABN Amro, Societe Generale, Marex Financial and Natixis bank, specialising in commodity derivatives and options market-making.
During this time, Elliott’s client list included Goldman Sachs, JP Morgan, Credit Suisse, Schroders Asset Management, and the Pennsylvania State Public School Employees Retirement System, amongst others.
April is a trained journalist and the Content Editor for MoneyTransfers.com. She has 10 years experience writing about a diverse range of subjects, from financial services to arts and entertainment. When she’s not writing about global remittances she can be found daydreaming about her next holiday abroad.