Foreign Exchange Risk: A US Small Business Worksheet

Foreign exchange risk arises when a business’s costs or receipts are denominated in a currency different from the one used to measure its operating result. Trade.gov explains the uncertainty between agreeing a deal and receiving payment. A US company should first list committed invoices, expected dates and currencies. Distinguish an actual payable from a possible future order. Quoting in dollars can shift some currency exposure to the other party, but it may affect competitiveness and does not eliminate all commercial risk. Begin with the contract and cash-flow facts rather than trying to predict the next exchange-rate movement.

Assume a US importer owes €10,000. At a hypothetical rate of $1.10 per euro, the dollar requirement is $11,000 before fees. At $1.15, it becomes $11,500, a $500 difference. These are invented scenarios, not current rates or forecasts. Add the provider’s conversion spread, transfer charges and settlement timing separately. Apply the same method to receivables so the business can see how a weaker foreign-currency receipt affects its dollar budget. Keep the invoice currency and the bank account currency explicit; an apparently favorable rate can be offset by fees or an additional conversion.

Match expected receipts and payments where operationally sensible, shorten unnecessary delays and review quotation validity. Discuss any hedging instrument with a qualified bank or adviser, including obligations, fees, collateral and what happens if the underlying transaction changes. A forward contract is not simply a free option to take a better future rate. Define who may approve currency transactions and preserve the reason for each decision. The objective is to manage the business’s exposure within an agreed policy, not to create speculative positions. Review actual conversion costs and forecast errors after settlement to improve the next budget.