When is the right time to consider FX risk management?
The best time to consider FX risk management is before currency movements affect your finances. These six situations can help you recognise when to review your approach.
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Does your business pay suppliers or receive revenue in foreign currencies? It could be time to consider FX risk management before exchange-rate changes have a noticeable impact on budgeting, forecasting or profit. Start by understanding your exposure and decide how much uncertainty your business can accept.
An FX risk management strategy does not need to be complicated. If foreign-currency volumes are very small or receipts largely match payments in the same currency, Spot FX may be sufficient for the time being. When exchange-rate movements could materially affect the business, hedging tools such as forward contracts may help to manage the exposure. The choice also depends on how certain the payments and receipts are: amounts or dates that may change call for flexibility and regular review.
Six situations that make an FX review worthwhile
An exchange-rate movement can change the cost of an order or the value of a sale before any money changes hands. Any one of the following situations is a reason to assess that risk.
You are entering a new market
New suppliers or customers can introduce a currency your business has not managed before. Review how the invoicing currency and payment terms could affect your costs and revenue before committing to the first transactions.
Your foreign payments or revenues are growing
As international activity increases, the same exchange-rate movement can have a larger financial impact. Review total payments and receipts, including whether incoming funds can cover outgoing payments. It is also important to consider what could happen when the exchange rate moves.
One transaction represents a major commitment
A large equipment purchase or business loan can create significant exposure even if you rarely trade internationally. Assess what an adverse movement would mean for the project budget or expected profit margin before agreeing the terms.
Payment terms leave you exposed for longer
The gap between agreeing a commercial price and converting currency creates uncertainty over the final value. Longer supplier terms, delayed collections or extended project timelines make it particularly important to review that exposure early.
Currency volatility could undermine your budget
Check how sensitive your budget is to the rate used in your calculations. If a movement could materially reduce expected profit margins or create a cash shortfall, assess how to manage it before the assumptions are tested by the market.
Your team handles each FX decision differently
If conversions depend on individual judgement or are delayed while waiting for a better rate, the business may be accepting risk without a clear decision. Agree when to act, who approves transactions and when to review the approach.
Keep in mind
A review may lead to a simple policy or a more structured approach. The priority is to have a plan for managing currency risk, with clear responsibilities and regular reviews. It does not automatically mean hedging every transaction.
Two examples of how currency movements affect payments and revenue
Example 1: An importer faces higher costs in CHF
A Swiss importer orders USD 200,000 of goods each month, several months before payment. At CHF 0.90 per USD, an order costs CHF 180,000.
At CHF 0.94, it costs CHF 188,000. If resale prices are fixed, that increase reduces gross profit. Reviewing the exposure when orders are agreed helps the importer decide whether to cover some confirmed commitments and how to handle uncertain future volumes.
Example 2: An exporter receives less than budgeted
A Swiss exporter agrees a EUR 150,000 sale, payable in 90 days, while most costs are in CHF. At CHF 0.95 per EUR, the expected receipt is CHF 142,500.
If the rate falls to CHF 0.91 before conversion, the receipt becomes CHF 136,500. Reviewing the exposure when the sale is agreed allows the exporter to consider protecting its CHF revenue or using the euros to meet matching costs if they exist.
Key takeaway: In both cases, the foreign-currency price is unchanged. The potential financial impact is reason enough to consider an FX risk management strategy before making or receiving payment.
The figures and exchange rates used in these examples are hypothetical.
Assess your exposure and choose the right response
Map payments and collections
List upcoming foreign-currency payments and customer receipts by the amount, currency and expected payment date. Include the exchange rate used in the budget, and distinguish confirmed transactions from forecasts. Uncertain flows still belong in the assessment but they may require a different response.
Identify payment flows in the same currency
Identify receipts that could fund payments in the same currency. Check that the amounts, timing and certainty align. This shows how much of each currency the business may still need to buy or sell.
Assess what remains
Test how an adverse exchange-rate movement would affect the remaining exposure and your financial plans. Decide how much risk the business can accept, which transactions need protection and who can approve action. The FX risk-management solutions below can then be assessed against those needs.
Approach | When it can be used | What it does |
|---|---|---|
A conversion is needed now, or the business accepts the remaining currency risk. | Converts at the available rate. It does not fix a rate for a future transaction. | |
The amount and expected timing of a future payment or receipt are reasonably clear. | Fixes a rate for a future exchange. The contract is binding, even if rates later improve. | |
A deliverable forward is unavailable or less appropriate for the currency. | Settles the difference between an agreed rate and a reference rate, without delivering the underlying currency. | |
Option | Protection and flexibility are needed, and the costs and terms are understood. | Can protect against adverse moves while retaining potential upside. Premiums and obligations depend on the structure. |
Set a regular review schedule and revisit the plan whenever orders, forecasts or payment dates change. A strategy remains useful only if it reflects the exposure the business actually has.
SwissFx can enable you to assess your currency exposure and explore an approach suited to your business. Our FX audit provides a starting point for reviewing risks and existing processes. Where protection is appropriate, SwissFx offers forwards, non-deliverable forwards and options to support greater certainty around future payments and revenues.
Important: This article is for general information only and does not constitute financial advice. Any FX risk-management approach must reflect the specific circumstances of the business.
Put your FX risk management strategy in place today
Understand what currency movements could mean for your next international order or sale. Speak to SwissFx to review your payments and revenues, assess your exposure and identify the next steps for managing currency risk.