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Managing foreign exchange risk

Any business involved in international trade will be vulnerable to fluctuations in the exchange rate between currencies which could cause the cost of imports to rise and the value of exports to fall. This will have a big impact on the cash flow of the business.

In order to limit exposure to exchange rate risk, businesses should take steps to manage this risk. 

Use our selection of guides, useful links, books and articles to find more information on foreign exchange risk management

Useful links 

A guide to managing foreign exchange risk (CPA Australia)
Four page guide to the basics of managing foreign exchange risk from CPA Australia

Foreign currency and exchange rates (NIBusiness Info)
Guidance from NI Business Info that covers:

  • Foreign currency issues when importing or exporting
  • Identifying foreign currency risks
  • Forward foreign exchange contracts
  • Banking overseas and UK-based foreign currency accounts
  • Buying currency options
  • Foreign currency transactions and bookkeeping

Hedging and invoicing strategies to reduce exchange rate exposure: a euro-area perspective (EC paper)
Paper from the European Commission that argues that domestic-currency invoicing and hedging with exchange rate derivatives allow a fairly straightforward management of transaction and translation risk and discusses under which circumstances their use is optimal and management techniques for exchange rate exposure.

How to manage your currency risk and future currency payments (Economia)
Economia article from 2015 that identifies the kind of product required for the three core currency risk issues that the article identifies. Further articles on the subject can be found in the International payments section of the Economia website. 

Identify and manage foreign exchange risk (HSBC)
Brief guide from HSBC that looks at identifying foreign currency risk and outlines a four-part plan for managing the risk.

Managing foreign exchange risk (Export Development Canada)
Resources for managing foreign exchange risk from Export Development Canada - including a 34 page interactive guide to Building a foreign exchange policy.

Managing foreign currency risk - the do’s and don’ts (London Institute of Banking & Finance)
Industry Insight briefing from the London Institute of Banking and Finance looks at the main strategies for managing foreign exchange risk - 'do nothing; 'fix everything'; 'hedge part'; foreign currency bank accounts; forward exchange contracts; pure currency options.

Open to Export
The Open to Export website (a free online information service from the Institute for Export) has many articles on foreign currency exchange 

Online articles

The Library provides access to leading business, finance and management journals. These journals are available to logged-in ICAEW members, ACA students and other entitled users subject to suppliers' terms of use.

Treasurers at risk of unidentified FX exposures

The article focuses on the need of treasurers to have expertise on foreign currencies (FX) and tools to track movements. Other topics discussed include concerns over manual FX exposure identification and capture processes, pros and cons of automation of the FX process, and significance of market knowledge to treasurers.

What future for foreign exchange options

In this article, the author warns businesses with exposure to currency fluctuations to be certain of their business strategy. It highlights plans of financial services companies to withdraw from the Foreign Exchange Options (FX Options) market. It also highlights impact of the EU Referendum on the value of currencies like Sterling and euro.

Preparing for continued fx volatility

The article reports on the volatility of the foreign exchange market and its impact on corporate treasurers. The factors that contribute to the situation are discussed, including Great Britain's withdrawal from the European Union and the election of Donald Trump as president of the U.S. Also noted are the opinions of several foreign exchange market experts, including Richard Bibbey and Karl Schamotta, about the market's condition..

How to manage a short-term currency fluctuation risk

Mark D. Mishler and Samantha White 24 June 2016

A shifting currency landscape can wreak havoc on a balance sheet. The authors look at the actions that could be taken by a company as protection against currency swings.

Estimating cost of equity

Empirical reports of priced foreign exchange ( FX) risk raise the question of whether managers should adjust their cost of equity estimates for FX risk. To study this question, the authors empirically compare the cost of equity estimates of several risk-return models, including some that have explicit FX risk premia and others that do not.

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Articles and books in the Library collection

You can obtain copies of articles or extracts of books and reports by post, fax or email through our document supply service. To find out how you can borrow books from the Library please see our guide to book loans. Contact the library on 020 7920 8620 or email library@icaew.com

Selected articles

The whole picture
Treasurer, October 2014. pp.36-37
As corporations grow increasingly global, foreign exchange exposures are becoming a central focus of risk management for treasurers. FX risk management is not an isolated objective of any one part of the organisation: it requires co-ordination between those managing risks and strategic decision makers in business operations. The author asks which types of FX risks companies commonly encounter; what effect they can have on financial statements; and how the risks can be monitored and mitigated 

How exporters can minimise their currency exchange costs
Financial Management, August 2014. p.56-57
Exports provide potentially lucrative sources of revenue for businesses, as well as a means of expansion. However, many businesses are oblivious to the impact that fluctuating exchange rates can have on their bottom line. Those that venture into overseas markets unprepared tend to encounter currency costs. This article describes some of the problems, and how to deal with them, including hedging strategies

Currency planning
Practical Audit and Accounting, Vol.25. No.7. April 2014. pp.81-82.
As businesses become increasingly global, aided by advances in technology, the issues surrounding foreign exchange management become ever more pressing. Article discusses some of the straightforward steps that businesses can take to manage currency risk. Careful planning is the key to every aspect of success in managing foreign exchange risk, says the author. Also discusses: forward contracts, stop loss orders, options, and using volatility.

Got to be certain?
Finance and Management, No.212. July / August 2013. pp.12-14.
Characterises a number of risks associated when using business contracts where foreign exchange rates are involved, dividing them into economic, pre-transaction and transaction risks. Evaluates hedging as a response to currency risk, for example through instruments like foreign exchange "forwards" and options, as well as alternatives to hedging where it is not an appropriate course of action.

Harness your hedges
Treasurer, April 2013. pp.38-39
Looks at approaches companies may take to foreign exchange risk. Outlines the benefits of re-evaluation corporate hedging policies and strategies to take a more proactive approach to FX risk management.

Help for hedgers
Treasurer, October 2011. p.27.
Hedging in financial markets has become more common across industries and asset classes over the years as businesses have better recognised their exposures. The markets have opened up to customers of all sizes, enabling almost any company to hedge. This article considers the independent advice that treasurers need to ask for when hedging.

Selected books

The handbook of international trade and finance : the complete guide for international sales, finance, shipping and administration
Grath, A. (Kogan Page, 2016)
Contains a chapter on currency risk management 

Managing currency risk using foreign exchange options
Hicks, A. (Woodhead and the Association of Corporate Treasurers, 2000)
This book has been written with the corporate treasurer or finance director in mind. The objectives are twofold: firstly, to give a clear perspective of how FX options are derived from the underlying FX markets. Secondly, to give a clear understanding of the benefits, cost, risks and rewards associated with the various FX option strategies and how options can play a part in any company's FX risk management programme.

Managing foreign exchange risk: how to identify and manage foreign currency exposure
Bennet, D. (Pitman, 1997)
An essential guide for finance professionals with responsibility for foreign exchange. Includes sections on: the nature of currency risk; formulating successful hedging strategies; using forex instruments effectively; measuring the performance of your forex transations.

Further books and articles

Disclaimer: These publications from Atom Content Marketing are for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

Can't find what you are looking for?

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