When you buy in one currency, sell in another and pay or get paid weeks after the prices were fixed, the exchange rate joins the deal as a partner nobody invited. It puts in no capital and signs no contract, but it takes a slice of your margin or hands you one, depending on which way it moves, and it does so without the price of the goods changing at all.
Exchange-rate risk (or FX risk) is the possibility that a currency move changes the real margin of a deal between the moment the price is fixed and the moment the foreign-currency flow is paid, collected or hedged.
In this article’s example —a container you buy in dollars and sell in euros— GP is €2,091 (6.3 % of sales). If the euro falls 6.3 % against the dollar between fixing the prices and paying the supplier, that GP is zero. With a 10 % fall you do not earn: you lose €1,343. Below are the numbers, when the exposure ends, four ways to manage it and how to measure it on your closed deals.
Where the gap opens
The market moves the rate; the calendar decides how long you are exposed. Between the day you fix the purchase and sale prices and the day you buy the dollars with your euros (or hedge that position), time passes, and during that time you owe dollars you have not bought yet. It is a short dollar position that nobody wrote on the deal sheet.
The example: twenty tonnes of quinoa, bought for USD 34,000 and sold for €33,000, both prices fixed on day 0. With the euro at 1.10 dollars the purchase is €30,909 and GP is €2,091. The supplier gives you 60 days to pay, so you buy the dollars on day 60; the customer pays on day 75. To isolate the effect there are no other costs; in a real deal, freight, insurance and the rest would only subtract margin.
DAY 0 DAY 60 DAY 75
Prices fixed You pay USD 34,000 You collect €33,000
USD 34,000/€33,000 (buy the dollars) from the customer
│ │ │
└─ FX exposure ──────┘
└─ working capital ──┘The FX exposure ends on day 60, when you buy the dollars, even though the customer does not pay until day 75. Those fifteen days are still a problem, but a different one: you pay before you collect, and that is working-capital financing and credit risk, not exchange-rate risk. It is worth measuring them separately.
| Scenario | EUR/USD at payment | Cost in euros | GP in euros | GP on sales |
|---|---|---|---|---|
| Euro −10 % | 0.990 | 34,343 | −1,343 | −4.1 % |
| Euro −5 % | 1.045 | 32,536 | 464 | 1.4 % |
| No change | 1.100 | 30,909 | 2,091 | 6.3 % |
| Euro +5 % | 1.155 | 29,437 | 3,563 | 10.8 % |
| Euro +10 % | 1.210 | 28,099 | 4,901 | 14.9 % |
You can redo the table with a calculator: the cost in euros is 34,000 divided by the rate on the payment day. Look at the scale. A 5 % move either way changes GP by more than €1,400, over half the margin of the deal, without anyone having negotiated anything different.
Break-even rate = Cost in USD ÷ Sale in EUR
= 34,000 ÷ 33,000 = 1.030
Tolerable euro fall = 1 − 1.030 ÷ 1.100 = 6.3 % (= GP ÷ Sales)There is a handy rule behind that formula: when you buy and sell in different currencies, your margin percentage is how far the currency can move before you lose money. A 3 % deal tolerates 3 %. It holds when you isolate the exchange rate and keep the other costs constant; with freight, demurrage or claims along the way, the real margin is lower and so is the tolerance. If the terms and the volatility of your pair make a bigger move reasonable, the deal is badly priced even if the sheet says it is profitable. Try it with your own numbers in the currency risk calculator.
What widens the window and what does not
The window is not a fixed 60 days, but not every delay stretches it. Only what moves the foreign-currency flow does:
- The supplier’s payment terms: paying at sight or at 90 days is not only a cash matter, it also changes how many days you carry a debt in another currency.
- Delays that move the dollar payment: an extension from the supplier, a letter of credit that slips or a dollar invoice that arrives late, such as demurrage, move the date on which you buy the currency.
- Delays that only move the collection: a vessel that arrives late or a customer who pays at 90 days does not lengthen the EUR/USD exposure in this example, because the dollars were already bought. They worsen financing and non-payment risk, which are two other risks with their own measure.
- Verbal extensions: "pay me next month" is harmless if it affects a payment in your own currency, and a bet on the exchange rate that nobody records if it affects one in another.
The reverse case is just as common. A Latin American exporter who sells in dollars and pays local costs in their own currency —inland transport, suppliers, staff— is short the local currency: it hurts when the local currency strengthens between the price and the collection, because each dollar covers fewer costs.
Four ways to manage it
1. Natural hedge: buy and sell in the same currency
If you buy and sell in dollars, with similar amounts and dates, the operation hedges itself: what you owe and what you collect offset each other and the transaction exposure almost disappears. Almost: the date mismatch, the financing and the profit remain, and the profit will have to be converted into your base currency at some point. In return you push the risk onto the counterparty, who sometimes charges you for it in price. It is not always possible: the European customer usually wants euros.
2. Hedge with a bank forward
A forward fixes today the rate at which you will convert on the payment date. You close the gap, but you give up what you would have gained if the rate moved your way, and you take on a commitment to the bank that stays in place even if the deal slips or falls through. It makes sense when the amount and the date are fairly certain. Mind that the forward rate is not today’s rate: it includes forward points that reflect, among other things, the interest-rate differential between the two currencies, and the bank adds its margin and may ask for credit lines or collateral. It is the usual cover, described in the glossary as hedging; what it costs and on what terms depends on your bank.
3. Currency options
A currency option, or a combination such as a collar, protects against the adverse move and leaves part of the gain if the rate moves your way, in exchange for a premium or for giving up part of that benefit. It is more flexible than a forward and also more expensive or more complex. It tends to make more sense when the amount or the date is uncertain, as with a bid still to be awarded or a shipment that may slip.
4. Carry it with a written tolerance
Not every deal needs a hedge. The alternative is to decide in advance how much movement you accept and price accordingly: if the margin percentage does not cover the fall you consider reasonable for the term, either you hedge, or you raise the price, or you do not do the deal. A cheap variant is to build an exchange-rate buffer into the price when you budget. What matters is that the decision is deliberate and written down, not a consequence of nobody having looked at the exchange rate.
How to measure it on your closed deals
You do not need a new system. An afternoon and your last ten deals where you bought and sold in different currencies is enough to see the pattern:
- Write down three dates per deal: price fixing, payment to the supplier and collection from the customer.
- Look up the rate for each date. The ECB publishes a daily reference rate for about thirty currencies; it works as a common yardstick if you do not have your bank’s, but it publishes it for information purposes only and strongly discourages using it for transactions.
- Recalculate GP at the fixing-date rate. That is the commercial margin: what the trader negotiated.
- Recalculate GP at the rate on the date you bought the currency, or better, with the amounts the bank actually credited and debited.
- Subtract the two. The difference is the FX result. Rank the deals by it: if it always goes the same way, it is not bad luck, it is a position you have been carrying without knowing.
The exchange rate is one of the deviations between the expected margin and the settled one, alongside freight, demurrage and claims; the article on the margin you collect separates them one by one.
What Granel does about this, and what it does not
In Granel each cost line of a deal carries its own currency —there are six: EUR, USD, GBP, BRL, ARS and COP— and P&L and cashflow are consolidated in your organisation’s base currency at the ECB daily reference rate. It is a conversion and consolidation reference, not the rate your bank executes at: the ECB updates it once a day and it is not a real-time rate. The ECB publishes no rate for ARS or COP, so those depend on an additional provider.
When you record a receipt or a payment you can enter the amount that actually went through the bank in the deal’s currency, or the rate on its value date. When it exists, that figure replaces the daily reference; if you do not enter it, Granel converts at the daily rate and flags it. That lets you compare what was budgeted with what happened, which is the last step of the method above.
What Granel does not do is arrange or manage hedges, forwards or options, connect to your bank, or give you real-time rates. Deciding whether to hedge and executing it stays with your bank; what changes is that the deal already knows which currency each amount is in, and the gap between price and payment stops living in one person’s head.
Frequently asked questions
When does exchange-rate risk start?
When you fix a price or commit to a payment in a currency other than your own, and it lasts until you buy or sell that currency, pay, collect or hedge the position.
How do I calculate how much currency movement my margin can take?
Divide the foreign-currency cost by the sale in your currency: that is the break-even rate. Isolating the exchange rate and keeping the other costs constant, the tolerable fall in your currency is the margin on sales: a 6.3 % deal takes a 6.3 % fall.
What is a natural hedge?
Offsetting receipts and payments in the same currency so the operation protects itself, without buying any instrument. It cuts the exposure a lot, but does not always remove it: the date mismatch and the profit remain.
When does a forward make sense?
When the amount and the date are fairly certain and the margin percentage is smaller than the move you consider plausible over that term. If the date or the amount may change, a currency option fits better.
Does a logistics delay always increase exchange-rate risk?
No. Only if it moves the foreign-currency flow. If you have already bought the dollars and paid the supplier, a late vessel or a customer who pays later worsens your financing and non-payment risk, but not your exposure to the exchange rate.