Managing foreign exchange risk in times of high volatility

By Rylan Dawes. Published at Apr 2, 2020, in Features

Any currency can experience periods of high volatility. The current COVID-19 situation is introducing levels of volatility in foreign currency markets not seen since the 2008 Global Financial Crisis.

These levels of volatility can make or break a business that relies on importing or exporting goods. However, you can minimise these risks by having the right measures in place.

What is foreign exchange risk?

In simple terms, foreign exchange risk is the risk imposed on a business’ financial performance by changes in currency exchange rates. These fluctuating exchange rates can damage a business’ profitability by eating into margins.

Sources of foreign exchange risk

Essentially, any situation in which a business uses foreign currency can be considered a foreign exchange risk. But businesses that deal with more than one currency are more prone to foreign exchange risk than others.

These risks can come from:

  • Receiving income (including interest, dividends, royalties, etc.) and revenue in foreign currency
  • Needing to make payments in foreign currency to suppliers
  • Business loans made in foreign currency
  • Holding offshore assets, such as international business subsidiaries.

The danger for businesses

There are a number of ways that volatile foreign exchange can impact your business.

  • If you’re an importer, a falling domestic exchange rate can increase import costs, damaging your profitability. For example, if you are an Australian business importing from the US, a falling AUD can be harmful to your business.
  • If you’re an exporter, a falling exchange rate typically benefits you as your product pricing will become more competitive. However, a rising exchange rate will be harmful to your product pricing.
  • If you’re a local producer, rising domestic exchange rates can give importers more of a competitive edge over your products, and you lose your business to overseas producers.

But while typically volatile exchange rates can make a business nervous, there are a number of proven strategies that enable effective hedging against foreign exchange risk.

Managing foreign exchange risk

Spot transactions

Spot transactions, or spot contracts, are probably the easiest way to manage foreign investment risk. A spot transaction is a single foreign exchange transaction where you purchase and settle the amount ‘on the spot’ (or rather, within two business days). It provides very little notice time, and a shorter window for risk, so if you’re happy with the current foreign exchange rate, you can book in a conversion with a spot transaction. While this might mean you forego a better rate in the future, it does minimise the risk of future volatility in your desired foreign currency right now.

A Forward Exchange Contract (FEC)

A FEC allows your business to guard itself against price fluctuations by locking down an exchange rate at the current price, which is valid until a date set by you. While this contract provides peace of mind that you won’t actively lose money on your foreign exchange, it does mean that you can’t take advantage of any positive shift in foreign exchange rates.

Another downside is the fees imposed on this contract. A FEC locks in a specified sum of money. So for example, if you lock in US$10,000, but at the end of the contract you only needed US$8,500, then there is a contractual cost to cancel this remaining portion.

Natural hedge

For businesses that are already selling overseas (for example in the US), foreign currency bank accounts can also provide a great way to provide a natural hedge. For these businesses, rather than receiving in USD and converting to AUD, you can leave your USD balance in your USD foreign currency account. This is especially convenient if you have expenses also in USD as you can hedge against any fluctuations in AUD by just holding USD in your account. You also save on any potential double conversion fees the banks may charge (for example, converting from AUD to USD and then back to AUD).

Foreign currency bank accounts

A simple way to manage foreign currency risk involves setting up a foreign currency account . Then, to hedge against risk, simply deposit the required amount (plus a nominated surplus) into the account. This method allows you to make the most of FX rates when they’re strong by converting and holding the foreign currency until you need to make payment. It also ensures the correct funds will always be available and takes into account the potential fluctuations of the currency.

Article originally published by Airwallex.

View Our Investment Portfolios

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

Australian ASX Small Cap stocks | Why is Australia’s leading small cap publication

Founded seven years ago, is Australia’s leading and longest standing website for investor and finance news, education and expert opinion.

Published by StocksDigital, Finfeed was created to report daily on the comings and goings of ASX listed stocks in the small cap market.

As the first digital publication dedicated specifically to this space, Finfeed soon became the most trusted publication in the market, quickly garnering over two million page views – a number that continues to rise. provides its readers with informative articles that tackle the latest in market moving #ASX small cap news, plus exclusive content you won’t find anywhere else. It is aimed at those with an interest in investing, market education, company performance, start-ups and much more. is the only media organisation operating under the strength of a Financial Services License and is backed by leading journalists and analysts all with brands of their own.

The website aims to inform, educate and entertain with content that drills down into the heart of financial matters.

Finfeed is a leading source of investor and market information, with everything investors need to know about how to invest written in a way that anyone can understand. 

Over the years, the website has expanded beyond exclusively reporting on small caps, to profile Australia’s leading ASX listed small, mid and large caps as well as some of the country’s most successful CEOs and business leaders to find out what makes them tick.

Every day you will find fresh content covering:

Fast Facts

Over 4,000 articles published

Over 2.3 Million Page Views and counting

Over 10,000 followers on social media

Subscriber list growing by 2% monthly

Thanks for subscribing!