A guide to managing foreign exchange risk

In today’s globalized marketplace, businesses of all sizes are increasingly engaging in cross-border transactions to expand their reach and tap into new customer bases. However, one of the most significant challenges they face in international trade is managing foreign exchange risk. Fluctuating exchange rates, hidden fees, and complex financial processes can erode profit margins and complicate transactions.

To mitigate this, businesses can adopt strategies to manage currency exchange effectively – this article will explore more.

What does foreign exchange risk mean?

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 business in the US sells goods to a company in Europe and agrees to get paid in euros, but the euro drops in value before the payment is made, the US business might end up receiving less money than expected when the euros are converted back to dollars. This change in currency value can affect profits, pricing, and the overall cost of doing international business.

What are the main types of foreign exchange risk?

As these examples show, foreign exchange risk can significantly impact a business's financial health. Profit margins may shrink if currency values move unfavorably, whilst financial reports can become more volatile due to translation risk, which may affect investor confidence even if the core business remains strong.

B2B businesses operating in global markets often need to adjust their pricing, sourcing, and strategic plans to remain competitive amid changing exchange rates. Here’s how.
 

Four steps to optimize foreign exchange

Step 1: Assess your business’s currency exchange needs

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:

• How often does your business conduct international transactions?
• Which currencies are you most exposed to?
• Are you primarily importing, exporting, or both?

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.

Step 2: Choose the right payment methods and conversion strategies

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.

Step 3: Choose the best strategy to manage currency exchange 

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:

• Risk balancing: Losses in one currency may be offset by gains in another.
• Market opportunities: You can benefit from favorable exchange rates in certain regions.
• Better customer experience: Offering local currency pricing can improve trust and increase conversion rates.
• Pricing flexibility: You can adjust your pricing per region without being overly exposed to one currency’s movement.

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:

• You can set pricing clauses that adjust based on exchange rate thresholds.
• You may agree on a midpoint rate or shared buffer zone, absorbing gains or losses together.
• Some contracts include "currency adjustment clauses" that automatically rebalance the deal if the currency moves beyond a certain range.

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:

• Fairness and balance: Both buyer and seller share the exposure.
• Stronger relationships: Transparent agreements can build trust with international partners.
• Reduced individual burden: No one party carries all the currency risk alone.

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:

• Spot contracts: Buy or sell currency at the current market rate, usually for immediate transactions.
• Forward contracts: Lock in an exchange rate for a transaction that will happen in the future. This can be helpful for budgeting and financial planning.
• Currency options: Pay a premium for the right, but not the obligation, to exchange at a specific rate – giving you protection with flexibility.
• Foreign currency accounts: Hold money in foreign currencies to delay or avoid converting until the rate is favorable.

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:

• Protects profit margins on international sales or purchases.
• Reduces unpredictability in financial reporting.
• Offers peace of mind when planning cash flow or pricing strategies.

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:

• Spot contracts: Immediate transactions at the current rate – useful for short-term needs.
• Foreign currency accounts: Hold and manage multiple currencies, giving you more control over when and how to exchange.
• Swaps and derivatives: More advanced tools that allow you to lock in favorable terms over time or exchange one currency for another on specific dates.

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

• Gives more control over timing and terms of currency exchanges.
• Can be tailored to different parts of the business (e.g., supply chain vs. sales).
• Helps reduce impact from sudden currency swings in volatile markets.

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.