Foreign Exchange Risk: How to Protect Your Company from Changing Currency Values

Don’t let larger forces erode the real value of incoming revenue.

Most companies rely on global supply chains to deliver their services, including anything from purchasing grocery bags at scale to rare earth metals used to make the most complex computer chips. The benefits of global trade are irrefutable, but they are impacted by currency exchange rates, which can have either positive or negative effects on your bottom line, depending on which way the currency rates are moving.  

Foreign exchange risk (or FX risk) can occur in international business transactions when the value of a currency changes. As exchange rates fluctuate, companies must stay alert to this threat. 

In this post, you’ll learn more about the specific types of dangers and strategies for addressing them. 

Understanding FX risk

Transaction risk 

Exchange rates can change between the start of a transaction and when it’s eventually settled, potentially causing a loss for one side. 

Here’s a high-level example: Company A orders a shipment from Company B on the first of the month. The businesses are based in different nations, but their currencies are worth the same amount. They have a 1:1 relationship. 

Company B delivers the order. On the 30th day, Company A pays the invoice in its currency, but during those 30 days, the exchange rate has changed to 0.9:1. Company A’s currency is worth 10% less, so Company B suffers a 10% loss.  This means that Company B has fewer funds to pay its suppliers. Plus, any inflation occurring in those 30 days further erodes the payment’s value.  

Currency fluctuations can happen in any geography experiencing change or unrest. We have to look no further than what is happening to the US dollar amidst tariff negotiations, a potential slowing economy, and overall changes to the United States’ global posture. Since Jan. 1, the US dollar has fallen a little more than 9% in just under four months.  

How to reduce foreign exchange risk 

Accelerate invoice payments 

Transaction risk increases when there is a substantial time between placing the order and paying the invoice. When it’s a period of months, there’s a greater opportunity for currency values to rise or fall. 

Companies can shrink the window by incentivizing early payments from customers. With C2FO Early Pay, a business can offer customized discounts to its buyers, and, on average, get paid about 30 days ahead of schedule. Tracing back to our example with Company A & B; Company B could have mitigated the 10% currency loss, by simply offering an annualized 10% (APR) discount to Company A for payment 30 days early.  10% annually equates to an .83% discount over 30 days (1/12th of the annual rate) vs. the full 10% loss of currency value.  

Early payment has a greater time value because those funds can be reinvested in operations, improving the cash conversion cycle, or used to generate interest income, reducing or eliminating the cost of the discount. 

Stay alert and prepare for contingencies

Companies should monitor currency values to guard against foreign exchange risk. To account for increased risk, changes in local pricing may be required.

In some cases, businesses might consider a hedging strategy using currency overlays.

Companies can also purchase political risk insurance to protect themselves against unrest and other issues that could impact an international transaction. 

How C2FO can help

Businesses around the world use C2FO to accelerate payments from customers, no matter where those customers are based. To learn more about how the solution works, click here.