Foreign exchange risk in business: how to manage it properly?

What is currency risk in business?

Le currency risk refers to the potential impact of an exchange rate variation on a transaction carried out in a foreign currency. This applies to both exporting and importing companies.

Here's a concrete example: you sign a USD 10,000 contract with a supplier.

If the dollar rises by 5% before payment, this represents 500 € additional cost . On a large scale, these gaps become critical for margins.

According to a study BNP Paribas , nearly 65% of SME exporters do not hedge their foreign exchange risk, often due to ignorance or perceived complexity.

Yet it is an essential lever for protect your margins international markets.

What are the main types of currency risk?

Le currency risk does not always manifest itself in the same way. Here are the four main types you need to know about to best assess your exposure.

Transaction risk

This risk arises between the date of invoicing and the date of payment when the transaction is denominated in a foreign currency. A variation in exchange rates over this period can generate a net perceptions Example: you invoice a customer for 5,000 GBP, but at the time of payment, the pound has lost 3%. You lose 150 € of marge without having anticipated it.

Economic risk

It reflects the long-term impact of currency fluctuations on the competitiveness of a company.

This applies in particular to companies whose prices are directly dependent on foreign sourcing costs or international competition.

Translation or balance sheet risk

It concerns subsidiaries or assets held abroad. When you consolidate your financial statements in euros, the translation of these assets and liabilities may give rise to the following differences unfavorable exchange differences impacting your financial ratios.

Anticipated exchange rate risk

This is the risk associated with exposition future probable For example, an international call for tenders in a foreign currency can create exposure even before a contract is signed.

How do you assess your exposure to currency risk?

Before looking for a cover, you need to accurately measure exposure . Here are the essential steps to get you there.

Identifying foreign currency transactions

Start by listing all operations involving a foreign currency :

• Supplier purchasing

• Customer sales

• Loan repayments

• Rental income from subsidiaries

• Etc.

Even a modest part of your flows can create a significant risk if it concerns a particular product. volatile devise .

Measuring potential discrepancies in flows

Evaluate the impact of a rate change on your cash flow. For example, a French company buying $100,000 worth of merchandise a month could lose up to €5,000 in one month if the euro loses 5% against the dollar.

This measure allows you to prioritize the risks to be covered .

Monitor sensitive currencies (USD, CNY, etc.)

Some currencies present a higher historical volatility such as the US dollar (USD), Chinese yuan (CNY) or pound sterling (GBP).

Tracking their evolution via a monitoring tool or a personalized alert allows you to anticipate unfavorable movements .

Set up a monitoring dashboard

Centralize all your currency flow data in a single simple dashboard regularly updated.

This must include amounts, maturities, currencies involved and rate trends. This makes it possible to clear, actionable vision of your exposure in real time.

What are the consequences of poorly managed currency risk?

Poor management of currency risk can have a serious impact on the Group's profitability. direct impact on financial health of the company, particularly for those operating internationally. Here are the main consequences to anticipate.

Loss of margin or higher supply costs

An unfavorable deviation in the exchange rate can inflate purchase costs of raw materials or services in foreign currencies.

For example, if the euro falls by 5% against the dollar, a $50,000 invoice will cost approximately €2,300 more than at the initial rate. This nibbling away at margins and reduces profitability, especially when sales prices are fixed in advance.

Deteriorating financial ratios

Foreign exchange risk can also affect balance sheets This is particularly true when a company holds assets or liabilities in a foreign currency.

A change in the rate can increase debt in euros or reduce the value of receivables . This can lead to worsening debt ratios or distort profitability analyses.

A loss of export competitiveness

When the exchange rate works against the company, its prices become less attractive in foreign markets.

Conversely, local or weaker-currency competitors become more competitive. In the euro zone, for example, a French company exporting to the United States could see its sales slow sharply if the euro is gaining too much strength against the dollar .

How can you hedge against currency risk?

Faced with unpredictable markets, it is essential to adopt hedging strategies to secure financial flows and protect the company's profitability.

Pricing in euros whenever possible

The simplest method is to negotiate euro-denominated contracts especially with partners in the euro zone or who accept this currency.

Cela completely eliminates currency risk for the company, but this is not always possible in certain geographical areas or business sectors.

Use hedging contracts (forwards, options)

Financial instruments such as contrat forward are used to fix an exchange rate in advance for a future transaction.

Visit currency options give you the option (but not the obligation) to buy or sell a currency at a specific rate.

These solutions offer effective protection but require gestion active and sometimes a subscription cost .

Open multi-currency accounts

To have bank accounts in several currencies allows receive or pay without immediate conversion and choose the right time to transfer funds according to the rate. This limits unnecessary conversions and smoothes out market fluctuations .

Working with a secure platform like Heropay

Some platforms, such as Heropay, offer a simplified, centralized management multi-currency payments.

In addition to IBANs in different currencies they offer transparent exchange rates without mark-ups as well as a seamless interface for managing your international cash receipts and payments .

How does Heropay help companies manage foreign exchange risk?

Heropay helps companies regain control over their foreign currency flows with tools designed to simplify international operations.

You can generate several IBANs in different currencies to collect directly in the currency of your customers or pay your suppliers without immediate conversion.

The rate applied is Visa rate without mark-up which makes it possible to eliminate hidden margins often practiced by traditional banks.

Thanks to a clear, accessible dashboard, you can manage all your international payments from a single location.

This multi-currency cash pooling allows you to anticipate currency fluctuations better manage your cash and reduce overall exposure to currency risk.