How to manage FX risk before it impacts your profits

Exporting comes with many challenges, including late payments and shipping delays. But one exporting hazard is often overlooked: Foreign exchange (FX) risk. Here’s how to manage it and protect your profits from currency swings.

What’s foreign exchange risk?

FX risk, or currency exchange risk, occurs when shifts in currency values affect your costs or profits. If you quote prices, or pay expenses in a foreign currency, you’re vulnerable to this risk.

These risks affect both exporters and importers, as rising foreign currency rates can increase expenses and shrink profit margins. Global trade uncertainties such as changing tariffs or trade agreements can also cause unpredictable currency fluctuations, making it even more important to proactively manage FX risk.

When does FX risk begin?

Many exporters think FX risk starts when they invoice or receive payment. In reality, it can begin as soon as you quote a price in a foreign currency. You may not receive payment for your goods for weeks or months after making the quote and shipping the product. During that time, exchange rates can change and affect your profits.

Amesika Baeta, regional director at Export Development Canada (EDC), says exporters should think about FX risk even more broadly: “I’d argue that risk begins from the moment you start your business.”

That’s why it’s important to treat FX risk as a strategic consideration from the beginning, not just during quoting or financial operations. Whether you’re sourcing materials, negotiating contracts, or planning market entry, FX risk should be part of your business planning. 

What’s FX hedging?

FX hedging is a way to protect your business from currency fluctuations. Exporters typically manage FX risk using one of two main strategies:

1. Natural hedging: This means structuring your business, so you earn and spend money in the same foreign currency. For example, you set up a local office in another country, sell products in that market’s currency and also buy supplies there to reduce exposure to exchange rate changes.
2. Financial hedging: This involves buying FX hedging tools through an FX provider. This can include a forward contract, which is an agreement to buy or sell an asset at a specific price on a future date.

Why do some exporters wait to hedge?

Despite the benefits of hedging, many exporters wait until a deal is signed, or goods are shipped, before thinking about hedging. But by then, the exchange rate may have moved against you. Baeta says, “Hedging late means you’re reacting to risk instead of managing it proactively.”

There are several reasons exporters delay hedging, including:

Limited access to cash or credit

Some exporters hesitate to hedge because traditional FX options can limit access to the cash and credit needed to run a business.

Hoping the exchange rate moves in their favour

Andrew Verlaan, EDC’s regional director for Ontario, says this approach is speculation, not a business strategy.

“Forget this ‘casino’ approach and stay focused on your customers, your products and growing your company,” Verlaan says. “Speculation means betting on currency movements, while hedging is about protecting your business from them,” he explains. “You should export based on market opportunity—not the hope of a weaker dollar. This ensures your profits come from selling your goods and services—not from currency swings.”

No FX strategy in place

Baeta says companies don’t plan for FX risk. “Many companies simply assume it’s a cost of doing business,” she says. “But companies that are strategic, a bit more mature and sophisticated will put a proper strategy in place to make sure they’re not leaving any money on the table.”

How to protect your business from FX risk

Proactively managing FX risk reduces uncertainty and helps improve financial forecasting. Here are three steps you can take to protect your business:

1. Lock in exchange rates early: By securing rates upfront, you get clarity and control over your budget and can protect your profits from unexpected market swings. This also helps you create accurate financial forecasts and set realistic pricing.
2. Hedge based on sales projections: Verlaan says it’s a good idea to hedge based on your sales forecast. “For example, if you expect U.S. sales of between $10 million and $13 million this year, you could lock in exchange rates for the lower amount now to protect your margins from the start,” he says. “If sales exceed expectations, you can adjust your hedge accordingly.”

Avoid tying up cash or credit: Many traditional FX hedging options require your company to post collateral—money set aside as a guarantee—which is usually taken from your line of credit. For example, your financial institution may require you to set aside up to 15% of the hedging amount as a guarantee, reducing the cash available for your daily operations. 

How EDC helps you manage FX risk without straining your cash flow

EDC’s Foreign Exchange Guarantee (FXG) is designed for Canadian exporters who want to manage currency exchange risk without limiting cash flow, especially when navigating today’s uncertain global markets. FXG provides:

• Flexibility: EDC provides up to 100% coverage on your FX contract, so your financial institution won’t need to draw from your operating line and you’ll have full access to your working capital. 
• Options: While an FXG is issued through a Canadian financial institution, it can support FX contracts arranged with FX brokers. This gives you more choices for competitive exchange rates.
• Stability: By locking in exchange rates with confidence, you can protect your margins and focus on growing your business.

Find out how other Canadian exporters used EDC’s FXG to manage risk and expand into new markets.

Debunking common myths about FX risk and hedging

Even with tools like EDC FXG, some exporters hesitate to hedge because they don’t fully understand FX risks or strategies. Here are a few misconceptions:

“I don’t need to hedge since my customers pay in Canadian dollars.” 

Even if your customers pay in Canadian dollars, you may still face FX risk if you source materials, components, or services in foreign currencies. Currency fluctuations could increase costs and cut into your profits. A comprehensive hedging strategy considers your cost and revenue structures—not just how you get paid.

“I only export occasionally, so FX risk isn’t a big concern.”

Even infrequent exports can be affected by currency swings. A single transaction exposed to FX volatility can impact your margins or cash flow. Hedging tools, like forward contracts, can help protect your business by locking in the rate in advance. They’re flexible and can be used as needed.

“FX risk only matters for long-term contracts.”

Currency fluctuations can impact even short-term deals. A few weeks between quoting and payment is enough time for exchange rates to shift. Hedging early—even for short contracts—helps protect your margins and mitigate risk.

“I’ll just adjust my prices if the exchange rate changes.”

It’s not always easy to change your prices. Contracts, customer expectations and competition often limit what you can charge. Hedging gives you predictability, so you don’t have to rely on reactive pricing strategies that could hurt your market position.

“FX risk is only a problem in unstable markets.”

Even stable currencies, like the U.S. dollar, can fluctuate due to interest rate changes, elections, or global events. Familiar markets aren’t immune to volatility and assuming they are can expose you to risk.

“FX risk management is too complicated for small businesses.”

FX risk affects businesses of all sizes. Many small- and medium-sized enterprises (SMEs) assume hedging tools are only for large companies, but many solutions are designed to be scalable and accessible. Consulting with experts to tailor a strategy to your business is beneficial, no matter its size.

Start protecting your business today

FX risk can affect your profits if you don’t plan for it. Acting now gives you more control over your finances and helps you avoid surprises.

Learn how EDC’s FXG can help protect your margins and keep your business agile.