FX risk is the possibility that exchange-rate movements change the home-currency value of a foreign-currency cash flow, balance or commercial commitment. It can affect margin, cash requirements, reported results and the amount a customer or supplier ultimately receives.
Where does FX risk arise?
- Foreign-currency invoices and payables
- Receivables from overseas customers
- Foreign bank or provider balances
- Quotes valid for a future period
- Forecast purchases or sales
- Foreign subsidiaries and intercompany funding
How can the exposure be measured?
If a company owes €100,000 and the EUR/USD rate moves from 1.08 to 1.12 before payment, the USD cost rises from $108,000 to $112,000. The illustrative adverse movement is $4,000.
Illustrative payable exposure
| Calculation step | Rate or amount | USD value |
|---|---|---|
| EUR payable | €100,000 | Amount due |
| Rate when budgeted | 1.08 USD/EUR | $108,000 |
| Rate when paid | 1.12 USD/EUR | $112,000 |
| Illustrative adverse change | — | $4,000 |
The example excludes fees, timing differences and any hedge.
Transaction vs. translation risk
Transaction risk affects specific foreign-currency cash flows. Translation risk arises when foreign financial statements or balances are converted for reporting. Economic risk is the broader effect of currency movements on competitiveness and future cash flows.
How can it be managed?
Businesses can align invoice and cost currencies, net exposures, shorten quote validity, hold appropriate currency or use hedging instruments. The chosen control should match amount, timing and certainty of the exposure.
