FX Risk Management: A 2025 guide for CFOs & Corporate Treasurers

Managing FX risk is like maintaining your car’s engine. You can skip the annual service and oil changes if everything seems fine, but eventually, a breakdown is inevitable. By the time the warning lights come on, the damage is already costly.

Just like with an engine, proactively managing FX risk keeps things running smoothly and prevents expensive, last-minute repairs. A well-thought-out FX risk management strategy is like traction control on a slippery surface, helping to maintain control and direction as market conditions shift. Without it, companies risk spinning out of control when currency volatility hits.

In this blog, we will delve into recent risk management trends and key strategies for managing FX risks in 2025. In an era of heightened uncertainty, the ability to steer through volatility isn’t just a nice-to have — it’s a necessity for survival and growth.

 

FX risk management strategies

FX risk management is a comprehensive strategy employed by businesses to protect their profitability and mitigate potential financial losses caused by adverse currency fluctuations. For corporations dealing with multiple currencies, inadequate FX risk management can significantly affect key financial metrics, such as earnings before interest, tax, depreciation, and amortization (EBITDA), ultimately compromising profitability and financial stability.

Corporate treasurers and CFO’s can manage FX risk effectively by leveraging a range of strategies, including financial hedging tools, to safeguard their financial positions against unfavourable exchange rate movements caused by currency volatility:

• Hedging with forward contracts
• Utilising options to limit downside risk
• Employing currency swaps for flexibility
• Minimising exposure through natural hedging
• Consolidating transactions with netting and offsetting
• Enhancing FX risk management through counterparty diversification

 

Hedging with forward contracts:

FX forwards are over-the-counter (OTC) derivatives, which means they are traded directly between two liquidity partners and can therefore be customised around mutual requirements.

Currency forward contracts allow a business to buy or sell an agreed amount of an asset on a future date, at a price determined today. By locking in an exchange rate for the future, businesses can protect their bottom lines against currency volatility.

 

Utilising options to limit downside risk:

FX options are financial derivatives traded over-the-counter (OTC) or, less commonly, on exchanges. They grant the holder the right, but not the obligation, to exchange a specified amount of one currency for another at a predetermined exchange rate (strike price) on or before a specified expiration date, depending on the type of option.

FX option contracts allow businesses to mitigate downside risk while preserving some upside potential. These contracts often carry high premiums due to the option to exit the trade, which is not reimbursed if the trade is not settled.

 

Employing currency swaps for flexibility:

FX Swaps are Over-The-Counter (OTC) derivatives used by two counterparties to manage their currency exposures. In an FX Swap, the parties agree to swap a specified notional principal amount in one currency for an equivalent in another currency at the current spot rate. This setup enables the counterparties to hedge against currency risk by securing exchange rates for future transactions.

An FX Swap normally involves two transactions: an immediate exchange of currencies via a spot transaction followed by a reverse exchange using an forward transaction a later predetermined date.

 

Minimising exposure through natural hedging:

Natural hedging is a strategy businesses use to minimise financial risk by offsetting potential losses with corresponding gains. This approach involves aligning cash flows, assets, or liabilities in the same foreign currency to reduce exposure to exchange rate fluctuations.

Unlike financial hedging, which relies on external instruments like forward contracts or options, natural hedging is an internal risk management technique that does not involve additional costs or reliance on financial markets. By carefully managing operations, such as sourcing materials locally or matching foreign currency loans with international revenues, businesses can effectively reduce their exposure to exchange rate risks while maintaining operational efficiency.

 

Consolidating transactions with netting and offsetting:

Netting simplifies foreign exchange management by consolidating multiple currency transactions into fewer, streamlined transactions. This approach reduces complexity, helps to minimise costs, and is often used within businesses or between subsidiaries to manage and align FX exposures more effectively.

Offsetting takes a different approach to managing FX risk. It involves creating a counter-position to an existing currency exposure, typically by entering into a transaction that offsets potential losses from adverse currency fluctuations, ensuring financial stability amidst market changes.

 

Enhancing FX risk management through counterparty diversification:

In FX risk management, maintaining counterparty diversity is key to reducing credit risk and enhancing resilience. By working with a range of financial institutions, corporates can mitigate exposure to single-party failures, like the collapse of Credit Suisse, and better hedge against market volatility.

Counterparty diversity also promotes competitive pricing, enhanced access to market data, and informed decision-making. Corporates should perform thorough due diligence on counterparties, regularly reviewing their stability and performance to adapt to evolving market conditions.

 

Aligning corporate governance with risk management strategies

Corporate governance is integral to the effectiveness of FX risk management. Robust governance structures ensure that FX risk management practices are aligned with the corporation's overall strategic objectives and comply with regulatory requirements. This alignment not only safeguards the business against currency volatility but also enhances stakeholder trust and confidence in its financial management practices.

 

Establishing an FX risk management policy

Developing a comprehensive FX risk management policy enables corporations to address FX risks systematically. Such a policy should clearly define the organisation's risk appetite and incorporate a structured framework for ongoing risk assessment and management reviews. This framework should include regular stress testing and scenario analysis to assess the potential impact of market fluctuations on currency exposure.

To support these efforts, integrating advanced financial management software can facilitate real-time monitoring of exchange rates, automate reporting, and enhance decision-making capabilities, saving a business valuable time.

 

FX risk management: latest trends

Hedging amidst obstacles

Our recent FX reports indicate that 76% of UK and 82% of North American corporates are employing hedging strategies to manage currency risk, despite facing higher costs and stricter lending criteria over the past year.

Geopolitical tensions have notably influenced FX risk management in both the UK and North America. In the UK, 53% of businesses aim to lengthen their hedge duration due to global uncertainties. North America was responding even more strongly  coming up to the US election, with 66% of firms planning to extend their hedge durations and 29% looking to increase their hedge ratios.

 

Exploring AI for FX risk management

Manual and outdated FX processes can significantly hinder business efficiency. As a result, firms are increasingly shifting away from traditional providers and legacy infrastructure, replacing them with tech-enabled solutions.

Our research found that all UK and US corporate finance leaders polled (100%) are exploring artificial intelligence (AI) in some form. The main area for potential AI application is FX risk management, with 46% of North American and 43% of UK corporations concentrating on this field.

“The genie is well and truly out of the bottle with generative AI and any organisation not thinking about how this technology can enhance their offering risks being left behind. It’s clear from the findings that CFOs realise that in today’s fast-paced digital landscape, embracing AI-driven innovation is no longer optional but essential for staying competitive”. Sam Hunt, CTO at MillTechFX.

 

Maximising FX efficiency through outsourcing

FX is one of the largest and most liquid markets in the world, but also one of the most complex. Setting up and onboarding new FX counterparties, centralising price discovery and navigating the post-execution phase often have their own complications and can be a huge administrative burden for some corporates, eating up much-needed time and resources. In fact, 29% of UK respondents said they use outsourcing as it provides greater scalability and flexibility in operations.

Following episodes like the  , many market principles and regulations were introduced, such as the FX Global Code of Conduct and MiFID II, to avoid crises like this again. Whilst beneficial to the ecosystem, these rules and regulations require a lot of work in order to be met. This is why 29% of UK respondents say that they use outsourcing for risk management and compliance purposes.

 

Managing FX risk through MillTechFX

We know that FX hedging is 90% operational and 10% strategy, FX execution infrastructure and workflow automation are critical to limiting hedging costs and ensuring long-term flexibility.

MillTechFX risk management solution provides an easily integrated fixed-fee service mode, designed for finance teams to effectively identify and manage FX risk. By centralising FX operations, automating trade and settlement workflows, and providing comprehensive downstream reporting, you can trade with confidence knowing your business's balance sheet and income statements are safeguarded.

 

 

This blog post examines and refers to the data and results of surveys conducted by Censuswide on MillTechFX’s behalf conducted in June 2024 and September 2024 based on surveys of 250 CFO’s, treasurers and senior finance decision-makers in mid-sized corporates (described as those who have a market cap of $50mil up to $1 billion in North America and £38m to £770m in the UK).

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