Currency risk in import and export: how to manage it

Where the risk comes from and how to size it

In international trade, weeks or months pass between the first quote and the payment: order preparation, production, ocean transit, the credit period. Throughout that time the price in foreign currency is fixed, while its value in the currency you use to calculate costs and margin keeps moving.

Before choosing a tool, measure your exposure:

• amount in the foreign currency (receivables minus payables in the same currency),
• period from the moment the price becomes binding until the payment date,
• margin sensitivity: how far the rate would need to move to wipe out the profit on the deal.

If the margin is a few percent and the exposure lasts a quarter, ordinary rate movements can erase it. Hedging in that case is not speculation; it protects your calculation. When comparing import quotes, convert every cost line to one currency using the same rate and date; see the guide on landed cost.

Choosing the invoicing currency

The simplest way to remove the risk is to shift it to the counterparty by invoicing in your own currency. A Polish exporter selling in PLN, or a Philippine exporter selling in PHP, carries no exchange risk, but the buyer does, and will price it in or reject the offer.

In practice, the invoicing currency depends on:

• market convention: many bulk commodities are quoted and traded in USD,
• cost structure: if your costs are in EUR, selling in EUR reduces exposure,
• bargaining power: the side that needs the deal more usually accepts the other side's currency,
• access to currency accounts and conversion costs at your bank.

Negotiate the currency together with the price, not after it. An offer in EUR and an offer in USD are in effect two different offers, because the risk sits with a different party.

Forward contracts

A forward is an agreement with a bank to exchange a fixed amount of currency at a rate set today, on a specified future date. An importer who will pay USD 100,000 in 90 days can lock the purchase rate now. If the rate rises, the importer does not lose; if it falls, the importer does not gain.

Points to check:

• the forward rate differs from the spot rate by the interest rate differential between the two currencies; this is part of the pricing, not a fee,
• a forward must be settled even if the underlying trade is delayed or cancelled, so hedge confirmed amounts (a signed order), not forecasts,
• the bank requires a credit line or collateral; arrange this before the first deal,
• settlement flexibility: some banks offer forwards with a settlement window, useful when the payment date depends on vessel arrival.

Currency options give the right, but not the obligation, to exchange at an agreed rate. They cost a premium paid upfront and their terms can be complex. If a bank proposes a "zero-cost" option structure, ask for a written worst-case scenario and make sure you understand when you would have to convert a larger amount at an unfavourable rate.

Natural hedging

Natural hedging means matching inflows and outflows in the same currency. A company that imports raw material in USD and exports finished goods in USD can pay the supplier from customer receipts without converting.

Ways to build a natural hedge:

• a currency account where you collect receipts and pay suppliers,
• aligned payment terms, so the customer pays before your supplier is due,
• buying services (freight, insurance) in the currency you earn,
• borrowing in the currency of your revenue, if your bank allows it.

Natural hedges are rarely perfect because amounts and dates seldom match exactly. The remaining gap can be covered with a forward.

Currency clauses in the contract

When neither side wants to carry all the risk, the contract can split it. Common approaches:

If you reference official reference rates, note that the European Central Bank publishes them every working day but states that they are for information purposes only and strongly discourages using them for transactions. A bank rate or a central bank fixing agreed with your accountant may be a more practical reference; tax conversions follow their own national rules.

Put currency clauses into your international sales contract or into a framework agreement for repeat orders, where prices apply over a longer period.

Quote validity and currency risk

An often overlooked factor is the validity period of your quote. An exporter who gives a foreign-currency price valid for 30 days hands the buyer a free option: if the rate moves in the buyer's favour, they accept; if not, they look elsewhere. A shorter validity period, or a reservation that the price will be updated if the rate moves beyond a threshold, limits that exposure.

Practical checklist

• You know your net exposure per currency and its horizon.
• You know how far the rate can move before the deal stops being profitable.
• The invoicing currency is negotiated together with the price.
• Forwards cover only amounts confirmed by an order.
• Receipts and payments in the same currency run through one currency account.
• Any currency clause names the rate source, date, time and includes a worked example.
• Quote validity matches the volatility of the currency pair.

Managing currency risk does not require a treasury department. It requires consistency: price every offer in your cost currency, hedge only what is certain, and write the conversion rules into the contract. On Hiram, quotes are compared by total landed cost under Incoterms 2020, which makes the effect of currency choice on the final number easier to see. Post a request on the Hiram market and compare the quotes you receive.

This article is informational. Decide on derivatives and tax treatment together with your bank and tax adviser.

Sources

• European Central Bank, Euro foreign exchange reference rates: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/index.en.html (opens in a new tab)
• Narodowy Bank Polski, Exchange rates (Polish): https://nbp.pl/statystyka-i-sprawozdawczosc/kursy/ (opens in a new tab)