Foreign Exchange Exposure Definition

Foreign exchange exposure

Foreign exchange exposure refers to the risk a company undertakes when making financial transactions in foreign currencies. All currencies can experience periods of high volatility which can adversely affect profit margins if suitable strategies are not in place to protect cash flow from sudden currency fluctuations. Exchange rate risk can usually be managed through effective, preemptive hedging.

When supply chain payments or critical accounts are based in foreign currencies, companies may choose to employ a targeted currency strategy to minimise foreign exchange exposure. These strategies usually involve contracts that allow companies to lock in an exchange rate for an extended period of time, often up to one to two years.