Currency risk arises when a company invoices or buys in a currency other than the one in which it has costs. Several months can pass between agreeing a price and receiving payment, and an exchange-rate movement during that time can reduce the margin on the deal or wipe it out entirely. The risk can be managed in several ways. The simplest is to agree invoicing in the domestic currency, which, however, reduces competitiveness. Another is natural hedging, that is, buying inputs in the same currency in which the company sells. For larger volumes, banking instruments are used that fix the exchange rate to a future date. A currency clause allowing a price adjustment in the event of a significant movement can also be inserted into the contract. The choice depends on the volume and on the length of the business cycle.
See also: Pricing for foreign markets, Exchange rate differences in a project, Export financing and insurance.
