Exchange rate fluctuations: how to protect yourself?

Companies with international operations have to set their prices in different currencies. To preserve their margins, they have every interest in protecting themselves against currency exchange risks. There are a number of ways to reduce the inconvenience of fluctuating exchange rates.

War in Ukraine upsets forex markets

The foreign exchange market, where participants come together to buy or sell one currency against another, has changed dramatically in recent years. According to the Bank for International Settlements (BIS), in just 3 years, activity has soared by 30% to a record $6,590 billion a day.

The war in Ukraine has had a profound impact on exchange rates. In the space of 2 months, the ruble has gone from being the weakest to the strongest currency, gaining almost 12% against the dollar and 21% against the euro. It has to be said that, in the current context, transactions involving the ruble are falling sharply, with no bank taking the risk of quoting the currency in significant sizes.

Investors and companies involved in transactions, investments or financing in foreign currencies therefore need to be aware of currency risk.

Strengthen hedging against currency risk

Currency risk can be defined as the uncertainty of the exchange rate of one currency against another. Companies with international operations face three main types of risk:

  1. Transaction exchange rate risk: this corresponds to an unfavorable movement in the exchange rate between the conclusion of the contract and the settlement date.
  2. Currency translation risk: this can arise when the exchange rate of the country in which the company operates is unfavorable.
  3. Economic exchange rate risk: this mainly concerns foreign companies, whose competitiveness may be affected by an unfavorable change in their currency.

To protect themselves against exchange rate risk, companies starting out in the export market have every interest in invoicing in euros, so as to pass this risk on to the customer. The buyer will therefore see the price evolve from one day to the next according to the exchange rate.

Another option is to define the exchange rate with the customer, setting minimum and maximum exchange rates between the two currencies in the sales contract. This method enables the seller to secure his commercial margin in the event of a collapse in the foreign currency.

Finally, it is possible to reduce exchange rate risk by taking out insurance. Bpifrance, for example, markets a "Change Négociation insurance policy" which fixes the exchange rate at any time during the trading period, right up to the last payment term. For their part, banks offer forward investments that lock in the exchange rate at a future date.