Foreign Exchange Risk Management: Key Insights for Growing Businesses
Many businesses have visions of lucrative and seamless international expansion, but the reality is more hard work to manage the process and associated financial risks. Managing increasing financial risk requires skill and know-how, otherwise the potential rewards of expansion can be eroded.
For growing businesses looking abroad, managing foreign exchange (FX) risk seems like a boring and technical subject matter that won’t materially impact the economics of the expansion. However, businesses are frequently caught out, either by doing nothing or implementing the wrong approach. It leads to reduced profits and in some cases burdensome liabilities.
The goal should be for this technical and boring subject matter not to detract from what the business is trying to achieve, bringing their product and services to new customers in a secure and sustainable way.
Why International Markets Matter for Growing Enterprises
There are numerous facts to quote as to the importance of global trade and SMEs increasing such activity, but here are a few highlights:
Small to medium sized enterprises (SMEs) contribute an estimated 20–40% of exports in major economies.
SMEs form the backbone of most economies, accounting for roughly 99% of businesses and two-thirds of private sector employment.
There is an “export gap”, which highlights the continuing untapped potential for SMEs trading abroad.
Modern technology and business approaches are changing perceptions and actions. Nearly half of UK mid-market companies plan to increase the number of countries they sell to, with 43% expecting higher revenue from abroad.
For many growing businesses, international expansion has become almost an expectation, as it is now far easier to access international markets. The venture needs to be conducted with some planning and risk management. Several governments and economic institutions have been encouraging businesses to expand overseas, yet with increasing economic and currency volatility it has meant unintended and challenging environments for many businesses. Businesses profit margins and financial stability have been materially impacted by currency fluctuations.
How Foreign Exchange Impacts International Expansion
The most effective way to consider the impact of the risk is by using recent examples. Below are some significant macroeconomic events, the corresponding impact on currency valuations and the potential impact on business profits.
Financial Crisis (2008): In a 6 month period from June to December 2008, the British Pound (GBP) depreciated 25-30% and the Euro (EUR) depreciated 20% against the US Dollar. It was a perfect storm for currency devaluation, global uncertainty and risk aversion meant a flight to the US Dollar as it is seen as a safe haven currency. With likely recessions in the UK & EU, and loosening monetary policy through reduced interest rates, made the assets and currencies of the economies less attractive to investors.
Brexit (2016–2020): In a 7 month period from May 2016 to December 2016, the British Pound (GBP) depreciated by up to 15%. Even during the UK’s Brexit negotiations there was extreme currency volatility. In one week of October 2019, GBP’s one-week implied volatility spiked above 17% and the currency’s value depreciated by 4%. Reacting to volatile markets will likely cause more harm than good as a business may act on a market spike that reverts shortly afterwards.
COVID-19 Pandemic (2020): The initial phase of the pandemic saw a similar flight to safety as the financial crisis as the US Dollar increased in value against the British Pound by 12% in 3 weeks during early to mid March 2020. Many based in the City of London will have a distinct memory of that sharp change. Yet swift central bank actions later stabilised markets, within 3 months the currencies were trading at similar levels prior to the outbreak of the pandemic. The pandemic is an apt example of how economic uncertainty manifests in currency markets, currencies are often more volatile than other asset classes making management even more delicate.
Mini-Budget (2022): The Liz Truss’s government in September 2022 held the commonly referred to “mini-budget”, leading to a small macroeconomic crisis for the UK economy as confidence dissipated due to plans for unfunded tax cuts. The sharp fall in the British Pound was one of the defining market reactions. The British Pound fell in value by 11% during September 2022, almost to parity against the US Dollar (1.035). It had been quite the fall for the Pound since mid-2008, when one British Pound could buy two US Dollars.
Recent Developments (2025): Trade wars and tariff announcements led to uncertainty that rattled FX markets. The US Dollar and Chinese Yuan experienced heightened volatility. The safe haven currency has been the Euro. The Euro has appreciated against the US Dollar by over 13% in 2025. An inverse move against the more recent flights to safety in the US Dollar, which has caught out a number of businesses and even financial institutions.
For a UK or European importer of US Dollar denominated goods, the currency devaluations of the financial crisis would have increased costs by 20-30%. The more recent strengthening of the Euro in light of the US trade tariffs could have seen US Dollar denominated revenues of European businesses reduce by over 13%. The currency move can be sudden and sharp, but the significant macroeconomic paradigm shifts generally maintains a long term change in currency valuation which can impact business profits (returns) by as much as 10-20%.
Another lesson to learn from recent macroeconomic history is that volatility can be short-lived. Currency markets are often at the forefront of investor sentiment, as seen with the Brexit negotiations, the Liz Truss “mini-budget” and the COVID-19 pandemic. Acting, or attempting to create plans during these periods, will often lead to a relatively extreme position in the long-run that will likely lead to an unfavourable outcome. Creating a plan, strategy and approach when expanding overseas will likely consider such extreme events. The real skill lies in the ability to execute the plan and make decisions based on an objective risk framework that has been established ahead of such events.
Our Research and Analysis
In some in-depth research, we analysed a sample of “growing” UK firms listed on the Alternative Investment Market (AIM) and compared them to a sample of large FTSE 100 multinationals. The results identified some clear themes:
the smaller AIM firms had FX exposures that were proportionately very similar to their FTSE 100 counterparts;
overseas revenue and costs made up a significant share of business for both groups;
the way the two groups managed the FX risk differed dramatically;
the AIM companies tended to have ad hoc or limited FX risk mitigation plans;
whereas the large corporates employed structured hedging programs and dedicated treasury resources.
In short, both small and large companies face material FX risks, but the smaller firms often lack the frameworks and resources that their larger peers use to deal with some of the currency volatility outlined above. The disparity suggests a clear opportunity for enterprises expanding overseas. Learning and adopting some of the best practices of larger firms, growing businesses can better protect themselves against the headache and noise of swings in currency valuation.
Future Content
There are a number of tools and techniques that can avoid management of currency risk being overly theoretical and impractical. We will try to use future blog posts and content to help businesses easily set a risk appetite, identifying where there are exposures, using the right tools to hedge or otherwise manage that risk, and reporting clear outcomes so that stakeholders stay informed. And for those with a desire and curiosity for the more technical elements, we can help explain the accounting, treasury and tax implications of hedging activity.
