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Flexible currency risk management solutions help businesses protect their commercial margins — and with exchange rates moving as unpredictably as they are, that protection matters more than ever.
Foreign exchange volatility poses a real threat to your margins. Prices negotiated in a foreign currency, the time between invoicing and payment, currency repatriation — these are just some of the reasons currency risk management deserves a closer look. If your company operates internationally, has overseas subsidiaries, or buys and sells in foreign currencies, FX risk management is worth exploring.
The first step in building a strategy is understanding your level of exposure and establishing a corresponding budget reference rate. But before diving into solutions, it helps to understand what FX volatility actually is, what drives it, and how it can quietly erode your margins if left unmanaged.
What is FX volatility?
FX volatility refers to how much (and how quickly) the price of a currency pair moves over time. High volatility means erratic price movements that are difficult to predict, while low volatility signals more gradual, stable shifts in the foreign exchange market.
For businesses making international payments, currency volatility creates uncertainty. The rate you see today may look very different by the time you actually pay a supplier or receive funds from a customer. Most forex volatility occurs around the release of major economic data, central bank announcements, and unexpected political developments.
How can currency volatility erode your profit margins?
When you agree a price with a foreign supplier or customer, you're often locking in a deal — but not the exchange rate. The forex market keeps moving between agreement and payment, and a few percentage points of currency movement can wipe out your margin entirely. This is especially painful for businesses operating on thin margins in competitive markets.
The longer the gap between terms and settlement, the more exposed you become. A 90-day payment window gives the foreign exchange market plenty of time to move against you — and makes budgeting nearly impossible when you can't predict what your costs or revenues will actually be in your home currency.
So what can you do about it?
The first step is to understand what drives currency volatility to begin with.
What causes currency exchange rate volatility?
Exchange rates are driven by supply and demand for currencies, and both shift constantly based on economic conditions, political events, and market sentiment.
Economic factors like interest rates, inflation, and central bank policies
Central bank decisions are one of the most direct triggers of FX volatility. When a central bank raises interest rates, the currency tends to strengthen as foreign investment flows in seeking better returns. Cut rates, and the opposite happens.
Inflation plays a role too. Countries with persistently high inflation often see their currency weaken, since rising prices erode purchasing power and make the currency less attractive to hold. Broader economic performance like GDP growth, unemployment, and trade balances also affects demand for a currency. A trade deficit (importing more than exporting) puts downward pressure on currency prices, while a surplus tends to support them.
Political instability and geopolitical events
Political instability generates volatility quickly, and it's tough to predict. Investors tend to move money away from countries experiencing turmoil, which can trigger outsized price movements in a short window.
Geopolitical events like trade wars, sanctions, elections, and natural disasters can all cause sudden shifts in currency values, sometimes within hours. Even rumours or speculation about political developments can move markets before any actual policy changes occur. For businesses operating across borders, this kind of FX risk is difficult to anticipate but important to plan for.
How to use forward payment contracts to protect against FX volatility
Several products aim to limit the effects of FX volatility, including different varieties of forward payment contracts. In short, a forward payment contract sets a predetermined exchange rate for a future payment denominated in a foreign currency to help protect your margins over time without tying up cash flow.
To take things a step further though, there are a few variants worth understanding, each offering different levels of flexibility.
Fixed forward payment contracts
A fixed forward payment contract locks in an exchange rate for a specific future date, with the full amount exchanged exactly on that date — no earlier, no later.
This is the simplest type of forward contract, and it typically offers the most favourable rate compared to the other types. Because the payment provider you're working with knows exactly when and how much currency you'll exchange, they can price it more competitively.
Fixed forward payment contracts work best when you have precise payment timing and amounts. The natural trade-off is the limited flexibility. You're locked into the exact date and amount, so this suits situations where your payment schedule is fixed.
Flexible forward payment contracts
Flexible forward payment contracts offer a guaranteed exchange rate that can be used over a predefined period rather than on a single date. The conditions (amount, rate, and timeframe) are set when the contract is established, but you can settle payments at any point within that window.
This protects against a rise in the value of the foreign currency you're buying, with no setup fees. Flexible forwards suit businesses managing multiple payments in international currencies over a period, where exact timing isn't fixed but the total amount is known.
Dynamic forward payment contracts
Dynamic forward payment contracts offer a guaranteed floor rate while also letting you benefit from favourable market movements during the contract period.
At maturity, you have two options: take the protection rate you locked in at the start, or take advantage of a better market rate if forex volatility has moved in your favour. This gives you downside protection with upside potential.
Start proactively managing your FX volatility with iBanFirst
FX volatility isn't going away, but you can control how exposed your business actually is to it. The right tools can help you lock in certainty, plan with confidence, and stop leaving money on the table.
iBanFirst gives growing international businesses access to the same FX risk management tools that were traditionally reserved for large multinationals.
With iBanFirst, you can:
- Lock in exchange rates for future payments using fixed, flexible, or dynamic forward contracts
- Hold funds in 25+ currencies through multi-currency accounts
- Get direct access to FX specialists who can help you understand which approach fits your business
