Currency risk

Currency risk: the likelihood of losses from changes in exchange rates. In foreign trade, it arises whenever the contract price is in one currency and the company’s money is in another.

Types of currency risk

• Transaction (operating) risk: the rate changes between signing the contract and paying. An importer with rouble revenue and a dollar contract pays more if the rouble weakens.
• Translation (balance sheet) risk: revaluation of foreign currency assets and liabilities in the financial statements.
• Economic risk: the long-term effect of the exchange rate on the company’s competitiveness and margin.

For an importer, transaction risk is the main one.

Where it arises in a payment

The risk exists over three periods:

1. from signing the contract to the payment date;
2. from the invoice being issued to the conversion of roubles;
3. from the debit of roubles to crediting the supplier, if the rate is set on the execution date.

The first two periods depend on your decisions. The third depends on how the payment is structured.

How the risk is reduced

• Choosing the contract currency, for example the currency of the supplier’s country, without unnecessary intermediate conversion.
• A currency clause in the contract: revising the price if the rate moves sharply.
• A forward contract and other hedging instruments.
• Paying in installments to average the rate.
• Fixing the rate before the money is debited.

What to watch for

If the agreement with the agent sets the rate after the roubles are debited, the risk of the third period stays with you. When VEDmost arranges the payment, the rate is fixed in the payment order for each payment before the roubles are debited. More on the Foreign currency contract payments page.