A small business that buys from a supplier in Germany, sells to customers in Canada or pays a designer in Mexico has a second, unpriced cost in every deal: the exchange rate on the day the money moves. This guide explains the three kinds of currency exposure, prices a 90-day euro bill with and without a hedge, and shows how to decide how much to hedge with forwards, options, invoicing currency and natural offsets.
What is foreign exchange risk for a small business?
It is the chance that a change in exchange rates alters the dollars you pay or receive, after you have already set your prices.
Even a major currency can move several percent within a quarter. On the European Central Bank's monthly averages, the euro rose 8.3% against the dollar in three months, from $1.0354 in January 2025 to $1.1214 in April 2025. It peaked at $1.1824 in February 2026, then slid to $1.1202 in October 2026, 5.3% lower. An importer that priced a euro order in January 2025 and paid in April would have spent about 8% more than planned.
The latest mid-market rate is 1 EUR = 1.1186 USD (Nov 2, 2026); our dollar and euro converter shows it live. The International Trade Administration's guide for exporters puts the aim plainly: managing currency risk is about limiting losses, not profiting from rate moves.
What are the three types of currency exposure?
Businesses face transaction, translation and economic exposure, and only the first usually needs action from a small firm today.
| Exposure | What it is | Example | Cash at stake? |
|---|---|---|---|
| Transaction | A known payment or receipt in a foreign currency that settles later | A €50,000 supplier bill due in 90 days | Yes, on the settlement date |
| Translation | Restating foreign assets, debts or a subsidiary's accounts in dollars at each period end | A euro bank balance or a Canadian subsidiary's books | Not directly; reported results swing |
| Economic | The longer-term effect of rates on your competitiveness | A strong dollar makes your exports dearer and imports from rivals cheaper | Yes, through future sales and margins |
Transaction exposure starts when you agree a price in another currency and ends when the money moves. It is measurable, dated and hedgeable, which is why most of this guide is about it.
Translation exposure matters once you hold foreign-currency balances or own a business abroad. The swings show up in your financial statements before any cash changes hands, and small firms usually accept them rather than hedge.
Economic exposure can hit a business that never sends a foreign invoice. If the dollar strengthens, a US manufacturer's goods cost more for foreign buyers, and imported rivals can undercut it at home. The responses are strategic and slow: diversifying suppliers and markets, and reviewing prices.
How much can a 5% currency move cost?
On a €50,000 bill due in 90 days, a 5% move in the euro changes the dollar cost by $2,793 either way.
Worked example: A US importer owes €50,000 in 90 days
A furniture importer agrees to pay a supplier in Italy €50,000 in 90 days. Using the ECB's reference rate of $1.1172 per euro on October 30, 2026, the bill is worth $55,860 today.
| Euro in 90 days | Rate | Dollar cost | Change from today |
|---|---|---|---|
| Up 5% | $1.17306 | $58,653 | +$2,793 |
| Unchanged | $1.1172 | $55,860 | $0 |
| Down 5% | $1.06134 | $53,067 | −$2,793 |
- Dollar cost = €50,000 × rate, for example €50,000 × 1.17306 = $58,653
- If the importer's margin on the order is 10%, about $5,600, a 5% rise in the euro takes half of it
The risk runs the other way for an exporter paid in euros: a weaker euro shrinks what each invoice converts to. If you sell in euros, the table shows what customer payments convert to at the mid-market rate and at two provider markups, before any fee.
| You send | At the mid-market rate | With a 0.5% markup | With a 2% markup |
|---|---|---|---|
| €10,000 | $11,186 | $11,130 | $10,962 |
| €50,000 | $55,928 | $55,649 | $54,810 |
| €100,000 | $111,857 | $111,298 | $109,620 |
How does a forward contract lock in a rate?
A forward contract fixes today the exchange rate for a set amount of currency on a future date, so the cost no longer depends on the market.
The International Trade Administration calls forwards the most popular hedge and says banks and FX providers offer them with delivery dates from three days to one year ahead. Separate fees are usually small, because the provider earns mainly through a spread built into the rate. The forward rate is not a forecast. It is the spot rate adjusted for the gap between the two currencies' interest rates:
Forward rate ≈ Spot rate × (1 + US interest rate × days ÷ 360) ÷ (1 + euro interest rate × days ÷ 360)
Worked example: Pricing and testing a 90-day forward on €50,000
Assume a US three-month rate of 4.0%, close to the Federal Reserve's target range of 3.75% to 4.00%, and a euro rate of 2.50%, the ECB's deposit rate, which it left unchanged on October 29, 2026.
- Fair forward rate: 1.1172 × (1 + 0.040 × 90 ÷ 360) ÷ (1 + 0.025 × 90 ÷ 360) = 1.1172 × 1.01 ÷ 1.00625 = 1.1214
- Assume the provider quotes 1.1250, so its margin is 0.0036 a euro, or $180 on the contract
- Locked cost: €50,000 × 1.1250 = $56,250, which is $390 (0.70%) more than today's $55,860: $210 from the interest-rate gap and $180 of margin
| Euro in 90 days | Unhedged cost | With the forward at 1.1250 | With an option at 1.1250 and an $840 premium |
|---|---|---|---|
| Up 5% | $58,653 | $56,250 | $57,090 |
| Unchanged | $55,860 | $56,250 | $56,700 |
| Down 5% | $53,067 | $56,250 | $53,907 |
- If the euro rises 5%, the forward saves $2,403
- If the euro falls 5%, the forward costs $3,183 more than doing nothing
- The option premium is an assumption, about 1.5% of the bill; real premiums depend on volatility and the chosen rate
The forward did its job in every row: the importer knew the cost on day one. Its price is giving up the gain when the euro falls, and the obligation to settle. The ITA warns that a forward must be honored even if the other side of your deal is late, so pick dates conservatively or use a window forward, which allows delivery any time between two dates.
The margin inside a forward quote works like a transfer markup, and our guide to exchange-rate markups shows how to measure one. The consumer protections in the Remittance Rule don't apply to business currency deals, so the contract's terms govern what happens if something goes wrong. US short-term rates, which drive forward pricing, are on our T-bill rates page.
Which other hedging tools suit a small business?
Several approaches cut exposure without a forward contract, and some cost nothing but a conversation.
- Invoice in dollars. Billing foreign customers, or agreeing supplier prices, in dollars moves the risk to the other side. The ITA notes the drawback: buyers often prefer their own currency, and a dollar-only policy can lose sales or, if the buyer's currency falls, make them struggle to pay.
- Natural hedging. Match receipts and payments in the same currency, for example paying a Mexican supplier with pesos from Mexican customers. Only the net amount is exposed.
- Multi-currency accounts. Holding euros or pesos lets you receive and pay without converting twice, which makes natural hedging practical. The balance still changes in dollar value until you spend it.
- Pay or collect early at spot. Converting at today's rate removes the exposure, at the cost of parting with cash sooner.
- Options. The right, but not the obligation, to exchange at a set rate. Useful for a large quote that may not be accepted, because you can walk away; the upfront premium makes them dearer than forwards.
- Price clauses. Long contracts can include a currency adjustment that resets prices if the rate moves beyond an agreed band, sharing the risk.
Paying people abroad raises the same choice on a smaller scale; our guide to paying international contractors covers invoicing contractors in dollars or their own currency.
How much of your exposure should you hedge?
Hedge committed amounts in full, then hedge enough of your forecast flows that a severe but plausible move costs no more than you can absorb.
Start from three numbers: how much foreign currency you will pay or receive, how sure each amount is, and the largest currency loss the business could take without trouble. Then test a stress move. The euro's 8.3% rise in early 2025 suggests a 10% move over six months is a fair test.
Worked example: Sizing a hedge for €200,000 of purchases over six months
An importer expects to pay €200,000 to European suppliers over the next six months. €50,000 is already ordered and €150,000 is forecast. The owner sets a loss limit of $5,000 and tests a 10% rise in the euro from $1.1172.
- Loss per unhedged euro in the stress case: $1.1172 × 10% = $0.11172
- Largest unhedged amount within the limit: $5,000 ÷ $0.11172 = about €44,750
- Amount to hedge: €200,000 − €44,750 = about €155,250, or 78% of expected purchases
- A layered plan: forwards for 100% of the €50,000 ordered, plus 70% of the €150,000 forecast (€105,000), for €155,000 in total
- Result: if the euro rises 10%, the €45,000 left unhedged costs €45,000 × $0.11172 = $5,027, roughly the limit
Hedging less of the forecast than of firm orders matters. If sales fall short and you have hedged 100% of a forecast that never happens, you are left with a contract to buy euros you don't need, which is a speculative position. One way to manage this is a rolling plan: each month, add cover for the coming months as orders firm up.
Which tool fits which situation?
Match the tool to how certain the amount is and who you want to carry the risk.
| Situation | Main exposure | Tools that fit | Trade-off |
|---|---|---|---|
| You owe a fixed amount in a foreign currency on a known date | Transaction | Forward contract, or pay early at spot | No gain if the currency falls |
| A customer will pay you in a foreign currency | Transaction | Forward to sell the currency, or invoice in dollars | Dollar invoices can cost sales |
| You both earn and spend the same currency | Transaction, partly offsetting | Natural hedge through a multi-currency account | Protects only the matched amount |
| A large quote may or may not be accepted | Possible transaction | Option | Premium paid upfront |
| Spending is forecast but not ordered | Transaction, uncertain | Layered forwards on part of the forecast | Too much cover leaves contracts you don't need |
| You own assets or a subsidiary abroad | Translation | Usually none for a small firm | Reported results swing |
| Foreign rivals gain when their currency falls | Economic | Diversify suppliers and markets, review prices | Slow, strategic changes |
Mistakes that make currency risk worse
A hedge can protect against the currency move and still go wrong through the way it is set up.
- Hedging to make money. A hedge that turns into a bet on rates defeats its purpose; judge it by whether costs became predictable.
- Mismatched dates. A forward that settles before the customer pays forces you to find the currency elsewhere. Build in slack or use a window forward.
- Ignoring the margin. Compare a forward quote with the fair rate from the formula above, and compare spot conversions with the mid-market rate in our currency converter.
- Forgetting the paperwork. Ask whether the provider needs a deposit or credit line for forwards, and what happens if rates move sharply before settlement.
- Overlooking tax and accounting. Section 988 of the US tax code generally treats currency gains and losses on business payables, receivables and forwards as ordinary income or loss, and your accountant may need the contracts to book them correctly.
For the basics of moving money across borders, such as how quotes, fees and payout methods work, see our guide to sending money internationally.