Date posted: 14/01/2025 6 min read

Expanding overseas? Mind your currency risk

Currency risk is a real issue for any company operating offshore. However, if managed well, it can also deliver financial benefits.

In brief

  • Carefully managed currency risk can deliver financial benefits to companies operating overseas.
  • Successful businesses use a mix of strategies to manage currency risk, including regular reassessment of the markets where they sell and/or source their products or services.
  • A good currency risk strategy is flexible, complex and dynamic, and typically requires input from a specialist.

It would be a mistake to consider currency risk a pure negative for a business, says Adrienne Sartori, founder and managing director of currency risk-management consultancy Sartori & Co. After all, downsides also come with upsides, meaning carefully managed currency risk can bring impressive financial benefits.

“Businesses that move into the international market have made a strategic decision to assume this risk,” says Sartori, whose company recently won the Best Currency Risk Management Advisory Firm 2024 – Australia award at the Worldwide Finance Awards.

“Most types of risk are about box ticking, setting up processes and rules to mitigate the risk, buying insurance, et cetera,” she adds.

“But currency risk is different. It is a strategic risk because a business owner has made a decision to expand their business and incorporate that risk. They need a strategy to manage it, but it has two faces, like a coin. There is a risk that the market moves against the business and it loses money, and there’s also a risk that the market moves in their favour and they miss out, because they’re not prepared.”

Four points of protection from currency loss

Tim Harcourt, industry professor and chief economist at the Institute for Public Policy and Governance at the University of Technology Sydney, outlines four methods import and export businesses use to manage currency risk:

  1. Constantly looking to different markets to sell their products and services. Diversify risk by diversifying territories.
  2. Refining and innovating their products and/or services at pace and with urgency.
  3. Reassessing sourcing options to ensure alternative suppliers in case one becomes less attractive due to currency changes.
  4. Hedging, such as holding a US dollar account or other relevant currencies.

“From the research, 20% of businesses hedge, but 68% of those say it’s effective,” Harcourt says. Other methods like market diversification and product innovation also show varying levels of effectiveness.

The case against hedging

While hedging can be smart, Sartori warns against potential downsides:

  • Transaction costs may outweigh the benefits for smaller businesses.
  • Hedging can limit flexibility by locking businesses into specific actions.
  • It requires specialist knowledge, which may distract from core competencies.

Success is all about smart hedging

Sartori highlights a case study that illustrates just how powerful currency risk can be.

One client was sold what appeared to be a perfect solution by their bank. It was a Smart Forward FX hedge product, and its purpose was to safeguard the client’s benchmark rate and, at the same time, offer benefits if the Australian/US exchange rate moved favourably.

But what would happen if the rate moved dramatically outside the range offered by the product?

When the Australian dollar unexpectedly surged, the client was forced to buy US dollars at a much lower rate, causing a foreign exchange loss of A$2.2 million.

“The banks will sometimes say that the market won’t get to a particular level, so it’s fine. But what happens if it does?” Sartori says.

“Often when I speak to people, they’ve experienced a disaster around currency risk. So, they already know, in broad terms, the impact of a poor risk management strategy.

“My approach is fundamentally different to what most banks and other advisers look at. They mainly look at the potential for loss, but there’s also a potential to lose market share and there’s potential to make financial gain. A really good risk management strategy gives you a variety of alternatives under all circumstances.”

What is a good risk strategy? It’s an adaptive one, she says. It accepts the fact that we’re in uncertain, volatile times and therefore recognises that there is no such thing as a fixed, set-and-forget strategy.

A good currency risk strategy is flexible, complex and dynamic, with numerous tools that can be utilised in any market condition. It’s an “intricate dance of currencies on the global stage”, Sartori says, and it typically requires input from a specialist who is not interested in selling specific products.

“If you can negotiate with the market to achieve an exchange rate that's better than what you budgeted, that’s managing your cost of goods sold or your effective selling price,” Sartori says. “That is simply good business.”


Setting local staff up for success

Expansion overseas often comes with other risks, including employing people from those markets. Christianna Methvin, vice president of sales at offshore outsourcing provider Intogreat Solutions, reveals the secrets to successful offshoring. 

For a small-to-medium business considering offshoring, success is all about starting with a clear plan.

First, you want to define your goals. Why are you offshoring? Is it to expand into new markets, reduce costs or fill skill gaps? Knowing your why sets the foundation for everything else.

Next, finding the right partner is key. You’ll want to work with a provider who understands businesses like yours and can guide you through the process. Look for someone with proven experience, a good grasp of cultural nuances, and scalable solutions.

This partner should also offer transparency and clear communication, so you always know what’s happening.

Once you’ve chosen that partner, understanding the local culture is vital. It helps build a strong connection with your team, even when you’re working across borders.

Recruitment is another big piece of the puzzle. Your offshoring partner should handle this for you, making sure the team members they bring on board aren’t just skilled but are also a good fit for your company culture.

Training is just as important; it sets the stage for success.

Communication is where the magic happens. Set clear KPIs and have regular check-ins to keep everyone aligned and on track. Technology plays a huge role here. Collaboration tools and secure IT systems can make it feel as if your offshore team is right there in the office with you.

Long-term success comes down to treating offshoring as a partnership, not just a cost-saving move. Build strong relationships with your team and partner, and you’ll see the benefits grow over time.

Audio articles

Explore Acuity On Air, the playlist where the pages of Acuity magazine come to life.

Listen now

Search related topics