Economic Risk

Changes in the competitive strength of imports and exports can create economic risk whereby not only your overseas trading but also your competitors can be affected by factors out of your control.

Mitigating these risks can be difficult for small and medium sized businesses although having dealings in more than one currency could help to offset any losses. Similarly, making your goods in the same country that you sell them will minimise economic risk.

Transaction Risk

If the exchange rate moves in the period between agreeing a contract and receiving or paying the money when importing or exporting, the amount of base currency paid or received will alter. There are various options available to companies to deal with transaction risk:

• Issuing the contract and invoice in your own currency to pass the risk to the other party
• Netting off sales and purchases in the same foreign currency to reduce your net exposure
• Opening a foreign currency bank account to handle sales and purchases in the same currency, which would minimise the need to convert to your base currency
• Delaying or bringing forward changing money into a different currency to try to beat rising or falling exchange rates
• Entering into a forward exchange contract which is a binding agreement to sell or buy an agreed amount of currency at a given time and at an agreed rate
• Using money market hedging, futures or options to lock in the value of a foreign transaction in your base currency to avoid the uncertainty of exchange rate fluctuations