The most common causes of foreign exchange risk are:
- making overseas payments for your imports that are priced in a foreign currency
- receiving foreign currency for your exports.
For example, if you plan to import $100,000 worth of stock from a supplier in the Far East in three months' time. If you simply wait and buy your US dollars in three months when you need to make payment, you have no idea how much that stock will cost you in sterling because of FX fluctuations.
Failing to protect against movements in foreign exchange rates effectively means buying or selling without having agreed a price in sterling.
Other causes of foreign exchange risk are:
- foreign currency borrowing or deposits
- overseas subsidiaries
- assets located overseas.