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In today’s global economy, businesses of all sizes are engaging in international transactions to reach new markets and customers. But with global growth comes a key financial challenge: managing foreign exchange risk. Fluctuating currency rates, unexpected fees, and complex payment processes can reduce profits and disrupt operations.
To protect your bottom line, it’s crucial to implement effective currency risk management strategies. In this article, we’ll explore how your business can navigate foreign exchange risk and leverage tools like forex hedging to trade with confidence.
This concept – also referred to as currency exchange risk or Forex (FX) risk – refers to the financial risk that arises from changes in exchange rates between two currencies in a cross-border transaction.
Foreign exchange risk in B2B transactions happens because shipping often involves delays between invoicing and payment, giving exchange rates time to change.
For example, if a Canadian business exports products to a customer in Europe and agrees to be paid in euros, a drop in the euro’s value before payment is received could result in lower revenue once the euros are converted to Canadian dollars. This shift in exchange rates can impact profits, disrupt pricing strategies, and increase the cost of doing international business.
This is the risk that exchange rates will change between the time a deal is made and the time payment is completed. As an example, a European company sells products to a buyer in Japan and agrees to get paid in Japanese yen. If the yen drops in value before the payment is made, the European company gets less money when converting yen to Euros.
This is the risk that a company’s financial statements will be affected by changing exchange rates when consolidating foreign assets or income. For example, a European logistics company has a branch in the US and needs to convert US dollar earnings into euros for reporting. If the dollar weakens, the company’s profits will look smaller in euros – even if nothing actually changed in the US business.
This is the risk that long-term changes in exchange rates will hurt a company’s competitiveness or future earnings. For example, a Canadian exporter sells goods to the US. If the US dollar weakens long-term, American buyers might find Canadian products too expensive and buy from local suppliers instead.
As these examples illustrate, foreign exchange risk can have a serious impact on a business’s financial stability. Unfavorable currency fluctuations can shrink profit margins, while translation risk may lead to increased volatility in financial reporting—potentially shaking investor confidence, even when the underlying business remains strong.
For Canadian B2B companies operating in global markets, managing currency risk is critical. Exchange rate movements can affect everything from pricing and supplier contracts to long-term strategic planning. Here’s how your business can adapt and stay competitive in a constantly shifting global economy.
The first step is to evaluate how and where your business interacts with foreign currencies. If you're a B2B company, that means looking at things like how often you're shipping products across borders, what countries you're doing business with, and which currencies you're using most.
Key questions to consider include:
By identifying where foreign exchange exposure exists – whether it's paying international suppliers, getting paid by overseas customers, or covering operational costs in another country – you can build a targeted strategy to manage that risk.
Selecting suitable payment options is not just about convenience – it directly impacts your conversion rates, especially for international online shoppers. Offering familiar and flexible payment solutions can reduce friction at checkout and build trust with cross-border customers.
Automated currency conversion services can help both buyers and sellers understand the cost in their local currency, reducing uncertainty and abandoned purchases. Many leading payment providers – like PayPal – offer this as an inbuilt feature.
Choosing how and when to convert foreign currencies – whether in real-time or at set intervals – can also protect against sudden exchange rate shifts.
Once you’ve identified where your business is exposed to foreign currency fluctuations, the next step is to choose how you’ll manage that risk. There are several approaches, each offering different levels of control. You can pick one or combine multiple strategies, depending on your goals, transaction volume, and risk tolerance.
Here are four well-established approaches to consider:
This is a proactive way to spread your risk across multiple currencies. Instead of relying on just one foreign currency (which could suddenly rise or fall in value), you conduct transactions in a variety of currencies. This helps cushion the impact of any single currency’s volatility.
As an example, if you sell to both the US and Europe, earning revenue in both dollars and Euros can reduce your reliance on just one currency, giving you more financial stability.
Benefits of currency diversification:
This is a collaborative strategy where you and your international partners agree to split the currency risk. This is often arranged during contract negotiations, where terms are built in to handle potential exchange rate changes.
How it works:
As an example, a German company and a Thailand supplier agree to split any cost impact if the Thai Baht strengthens beyond a certain limit before payment is due.
Benefits of risk sharing:
Hedging is about protecting your business from future exchange rate movements by using financial tools. It’s especially useful if you have large, predictable transactions and need to ensure price certainty.
Common hedging instruments:
As an example, a Canadian business expecting a large payment in euros in three months could use a forward contract to lock in today’s EUR/CAD rate, avoiding future losses if the euro weakens.
Benefits of hedging:
Forex hedging takes hedging a step further, using forex trading strategies and tools to actively manage currency exposure. This approach is often used by companies with high transaction volumes or more complex currency needs.
Key techniques include:
As an example, a company operating in South America and Southeast Asia might actively monitor exchange rates and use swaps to balance currency exposures across those regions.
Benefits of Forex hedging
At DHL Express, we understand the complexities of cross-border commerce because we operate in over 220 countries and territories. Whether you're shipping products, bringing in supplies, or juggling payments in different currencies, we’re here to make things smoother with smart, hassle-free logistics that work across borders.
By partnering with DHL Express, your business can streamline its operations, reduce the risks associated with currency volatility, and focus more on growth and customer experience – no matter where in the world you trade.