Doing business internationally opens the door to new customers, suppliers, employees, and markets.
It also opens the door to something less exciting: foreign currency risk.
A company might earn revenue in US dollars, pay employees in Israeli shekels, purchase services in euros, and report its financial results in another currency.
The business hasn’t necessarily changed.
But the numbers can.
A movement in exchange rates can affect revenue, expenses, cash flow, profitability, and the value of assets and liabilities. For companies with significant international operations, currency risk isn’t something that can simply be left to the market.
It needs to be understood and managed.
What is foreign currency risk?
Foreign currency risk is the financial risk created by changes in exchange rates.
Imagine a company expects to receive $1 million from customers.
If the company’s reporting currency is ILS, the value of that revenue in shekels will change as the USD/ILS exchange rate moves.
For example:
| Exchange Rate | $1 Million Value |
|---|---|
| 3.40 ILS/USD | 3.4M ILS |
| 3.60 ILS/USD | 3.6M ILS |
| 3.80 ILS/USD | 3.8M ILS |
The company didn’t sell more or fewer products.
The exchange rate simply changed the value of the foreign currency when measured in the company’s reporting currency.
That’s the heart of currency risk.
Why does currency risk matter?
Currency movements can affect several parts of a company’s financial performance.
Revenue
If customers pay in a foreign currency, changes in exchange rates can affect the reported value of sales.
Expenses
The same applies to costs. A company paying overseas suppliers may see its costs increase or decrease when exchange rates move.
Cash flow
A company may have plenty of cash in one currency but need to make payments in another.
Profitability
Changes in exchange rates can increase or reduce reported margins.
Balance sheet
Foreign-currency assets and liabilities may change in value when translated into the reporting currency.
For a company operating across several countries, these effects can add up quickly.
Transaction risk vs. translation risk
Not all currency exposure is the same.
Two concepts are particularly important.
Transaction risk
Transaction risk occurs when a company has a transaction denominated in a foreign currency.
For example, an Israeli company agrees to receive $500,000 from a US customer in 90 days.
The company knows how many dollars it will receive.
What it doesn’t know is exactly how many shekels those dollars will be worth when the payment arrives.
That uncertainty is transaction risk.
Translation risk
Translation risk is different.
It can arise when the financial results of a foreign subsidiary need to be translated into the parent company’s reporting currency.
For example, a global company may have an Israeli subsidiary whose accounts are maintained in ILS while the parent reports in USD.
Changes in the ILS/USD exchange rate can affect the translated financial statements even if the underlying local business hasn’t changed.
Understanding the difference is important because the two types of exposure may require different approaches.
Start by mapping your currency exposure
Before deciding how to manage currency risk, a company needs to know where the exposure actually comes from.
Start by listing revenue and expenses by currency.
For example:
| Activity | Currency | Annual Amount |
|---|---|---|
| US customer revenue | USD | $5M |
| European customer revenue | EUR | €2M |
| Israeli payroll | ILS | ₪8M |
| US suppliers | USD | $1M |
| European suppliers | EUR | €700K |
This immediately provides a more useful picture.
The company isn’t simply exposed to $5 million of revenue.
It also has $1 million of USD expenses that naturally offset part of that exposure.
The important number is often the net exposure.
Natural hedging
One of the simplest ways to reduce currency risk is to match revenues and expenses in the same currency.
This is often called natural hedging.
For example:
USD revenue → USD expenses
If a company earns $2 million and has $1.2 million of expenses in USD, only the remaining exposure needs to be converted into another currency.
The same principle can apply to other currencies.
A company might deliberately maintain some local expenses in the same currency as its local revenue.
This doesn’t eliminate currency risk.
But it can reduce it without requiring financial derivatives.
Should you hedge your currency exposure?
There isn’t a universal answer.
For some companies, currency movements are relatively small compared with the overall business.
For others, a relatively small change in exchange rates could have a significant impact on margins or cash flow.
Before implementing a hedging strategy, management should consider:
- Size of the exposure
- Expected timing of cash flows
- Currency volatility
- Business margins
- Cash requirements
- Cost of hedging
- Company’s risk tolerance
- Accounting implications
The objective of hedging should be clear.
The goal isn’t to predict where a currency is going.
The goal is to reduce unwanted uncertainty.
Common currency hedging tools
Companies with significant exposure may use financial instruments to manage currency risk.
Common approaches can include:
Forward contracts
A forward contract allows a company to agree today on an exchange rate for a currency transaction that will take place in the future.
For example, a company expecting to receive dollars in three months may use a forward to establish a predetermined exchange rate for part of that exposure.
Options
Currency options can provide protection against unfavorable exchange rate movements while potentially allowing participation in favorable movements.
They can, however, involve additional costs and more complex terms.
Currency swaps
Currency swaps can be used for certain longer-term exposures and financing arrangements.
The appropriate instrument depends on the company’s specific circumstances.
These instruments should be evaluated with appropriate financial and accounting advice rather than treated as a simple way to speculate on currencies.
Don’t hedge what you don’t understand
This is an important rule.
A company shouldn’t enter into a complicated hedging arrangement simply because currency movements are making management nervous.
First understand:
What is the exposure?
How large is it?
When will it occur?
What happens if the exchange rate moves by 5%, 10%, or more?
Only then can management decide whether hedging makes sense.
Otherwise, the company may end up replacing one risk with another.
Currency risk and cash flow forecasting
Currency management should be connected directly to the company’s cash flow forecast.
A forecast shouldn’t simply say:
“We expect $3 million of revenue.”
It should also consider:
- When the dollars are expected to arrive
- Which currency the expenses will be paid in
- When conversions will be required
- Expected exchange rates
- Existing foreign currency balances
- Hedging arrangements
This creates a much clearer picture of future liquidity.
For example, a company might have $2 million in cash but still face a short-term cash requirement in euros.
Having enough money isn’t always the same as having the right amount of money in the right currency at the right time.
Managing multiple bank accounts
International businesses may hold bank accounts in several currencies.
That can be useful, but it also creates additional work.
Finance teams need to track:
- Balance by currency
- Incoming payments
- Outgoing payments
- Bank fees
- Currency conversions
- Intercompany transfers
- Exchange rate differences
A monthly review of foreign currency balances can help identify unnecessary exposure.
There may be little value in holding a large balance in one currency when the company expects significant expenses in another.
Watch the cost of currency conversion
Currency risk isn’t limited to exchange rate movements.
Companies also need to consider the cost of converting money.
This can include:
- Bank fees
- Foreign exchange spreads
- Payment processing fees
- Transfer fees
For a business converting millions of dollars or euros every year, even a small difference in conversion costs can become meaningful.
That’s why companies should look at the total cost of moving money, not just the headline exchange rate.
Build currency scenarios into your forecast
Using a single exchange rate in a financial forecast can create a false sense of precision.
Instead, companies can model several scenarios.
For example:
| Scenario | USD/ILS | Annual USD Revenue | ILS Equivalent |
|---|---|---|---|
| Lower rate | 3.40 | $10M | ₪34M |
| Base case | 3.60 | $10M | ₪36M |
| Higher rate | 3.80 | $10M | ₪38M |
The purpose isn’t to predict the exact exchange rate.
It’s to understand how sensitive the business is to currency movements.
This can help management plan spending, hiring, pricing, and cash requirements.
Consider currency when setting prices
Currency risk can also begin with pricing.
A company selling internationally should consider whether prices are:
- Fixed in the customer’s local currency
- Fixed in USD
- Adjusted periodically
- Linked to a specific exchange rate
For long-term contracts, this can become particularly important.
If costs are rising because of currency movements while customer prices remain fixed for several years, margins may gradually come under pressure.
Therefore, pricing strategy and currency management shouldn’t be treated as completely separate issues.
Intercompany transactions add another layer
Multinational groups often have transactions between related entities.
For example:
US parent → pays Israeli subsidiary for R&D services
or
Israeli subsidiary → pays European group company for software or management services.
These transactions can create currency exposure in addition to transfer pricing and accounting considerations.
Finance teams should track:
- Invoice currency
- Settlement currency
- Payment timing
- Intercompany balances
- Exchange rate differences
- Reconciliation between entities
Intercompany balances should be reviewed regularly rather than left until year-end.
Common mistakes in managing currency risk
Ignoring the net exposure
Looking only at foreign revenue without considering foreign expenses can overstate the company’s actual risk.
Treating currency movements as business performance
A change in reported revenue may be caused partly by exchange rates rather than changes in customer demand.
Hedging without a clear policy
Individual decisions made whenever the market moves can lead to inconsistent risk management.
Holding unnecessary foreign currency
Large balances that aren’t needed for upcoming expenses can create additional exposure.
Forgetting about cash flow
A profitable business can still face a liquidity problem if its cash is held in the wrong currency at the wrong time.
Relying on one forecast scenario
Currency rates move. Financial planning should reflect that uncertainty.
Building a practical currency risk policy
As the company grows, informal decisions should be replaced with a documented process.
A currency risk policy might define:
Which currencies are monitored
What level of exposure requires action
Which hedging instruments may be used
Who can approve hedging transactions
How often exposures are reviewed
How hedging results are reported
How foreign exchange effects are reflected in management reporting
This creates consistency and makes the process easier to manage.
A practical currency risk checklist
Before closing the month, finance teams should ask:
- ☐ What currencies does the company have exposure to?
- ☐ What is the gross exposure in each currency?
- ☐ What is the net exposure after matching revenues and expenses?
- ☐ Which foreign currency balances does the company hold?
- ☐ Are there significant upcoming foreign currency payments or receipts?
- ☐ Have exchange rate movements affected reported results?
- ☐ Are intercompany balances reconciled?
- ☐ Are conversion costs being monitored?
- ☐ Does the cash flow forecast reflect currency exposure?
- ☐ Are existing hedges still aligned with the underlying exposure?
- ☐ Does management need to consider additional hedging?
The bottom line
Foreign currency risk is part of doing business internationally.
It can’t always be eliminated, and trying to eliminate every movement isn’t necessarily the goal.
The important thing is to understand the exposure and manage the uncertainty.
That starts with mapping revenues and expenses by currency, identifying the net exposure, using natural hedges where possible, building currency scenarios into financial forecasts, and considering appropriate hedging tools when the exposure justifies them.
With a clear policy and regular monitoring, currency becomes another financial variable that management can plan for rather than a surprise waiting at the end of the quarter.
Because when a company operates across borders, its money does too.
Good financial management means knowing where that money is, what currency it’s in, and what could happen to its value before it gets where it’s going.
