How can you mitigate currency risk when pricing imports/exports?

1 Use forward contracts

One way to hedge against currency risk is to use forward contracts, which are agreements to buy or sell a certain amount of foreign currency at a fixed rate and date in the future. This way, you can lock in the exchange rate and avoid any fluctuations that may occur before you receive or pay for your imports or exports. For example, if you are an exporter and you expect to receive $10,000 from a foreign buyer in three months, you can enter into a forward contract with your bank to sell $10,000 at the current rate of 1.2 euros per dollar. This means you will receive 12,000 euros regardless of the exchange rate in three months.

2 Use currency options

Another way to hedge against currency risk is to use currency options, which are contracts that give you the right, but not the obligation, to buy or sell a certain amount of foreign currency at a specified rate and date in the future. This way, you can benefit from favorable exchange rate movements and limit your losses from unfavorable ones. For example, if you are an importer and you need to pay 10,000 euros to a foreign supplier in three months, you can buy a currency option from your bank to buy 10,000 euros at the current rate of 0.8 dollars per euro. This means you can pay $8,000 if the exchange rate stays the same or lower, or exercise your option and pay $8,000 if the exchange rate rises above 0.8.

3 Use currency invoicing

A third way to hedge against currency risk is to use currency invoicing, which is the practice of choosing the currency in which you invoice your customers or suppliers. This way, you can shift the currency risk to the other party and avoid any exchange rate fluctuations that may affect your cash flow. For example, if you are an exporter and you have a competitive advantage over your foreign competitors, you can invoice your customers in your local currency and make them bear the currency risk. Alternatively, if you are an importer and you have a strong bargaining power over your foreign suppliers, you can invoice them in their local currency and make them bear the currency risk.

4 Use natural hedging

A fourth way to hedge against currency risk is to use natural hedging, which is the process of matching your revenues and expenses in the same currency or in currencies that move together. This way, you can reduce your net exposure to currency risk and minimize your hedging costs. For example, if you are an exporter and you receive most of your income in dollars, you can source some of your inputs or materials from dollar-denominated countries or regions. Alternatively, if you are an importer and you pay most of your costs in euros, you can target some of your customers or markets in euro-denominated countries or regions.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?