- An exporter’s currency risk consists of the net amount of its foreign currency receivables, payables and loans (the balance sheet position) and the foreign currency inflows and outflows expected over the coming months (the forecast position).
- Managing the risk starts with measuring the position: a currency position table by currency, with maturities, updated weekly or monthly.
- Hedging is a policy decision. The proportion to hedge, the instruments and the horizon should be written down; the aim is not to make money on the exchange rate but to make the margin and the cash plan predictable.
An exporting company earns its revenue in foreign currency, but part of its costs are in Turkish lira. Exchange rate movements change the lira value of the same sale, and so the margin. If the company also has foreign currency loans, the picture becomes more complex: a rising exchange rate increases receivables but also increases debt. This article explains how to measure currency risk and the framework within which management decisions can be taken.
Two layers of the position
| Layer | Content | Example items |
|---|---|---|
| Balance sheet position | Foreign currency assets and liabilities recorded today | Foreign currency receivables, deposits, trade payables, loans |
| Forecast position | Foreign currency flows expected in the coming period and not yet on the balance sheet | Order-based export collections, foreign currency raw material purchases, loan interest (principal is already in the balance sheet position) |
If the net position is “long” (foreign currency assets exceed liabilities), a rising exchange rate increases the lira value and a falling rate reduces it. The reverse applies to a “short” position.
Hypothetical example
Hypothetical example — not based on a real company.
Suppose an exporter’s euro balance sheet items and expected flows for the next three months are as follows. The example assumes EUR 1 = TRY 40.
| Item | Amount (EUR) |
|---|---|
| Euro receivables | 2,000,000 |
| Euro trade payables | (500,000) |
| Euro loan | (1,000,000) |
| Net balance sheet position | 500,000 |
| Expected euro collections (3 months) | 1,500,000 |
| Expected euro payments (3 months; excluding loan principal) | (600,000) |
| Net forecast position (3 months) | 900,000 |
A 10% rise in the exchange rate (40 → 44) increases the lira value of the net balance sheet position by 500,000 × 4 = TRY 2,000,000; a 10% fall (40 → 36) reduces it by the same amount. For the three-month forecast position the effect is 900,000 × 4 = TRY 3,600,000. This sensitivity shows how much the exchange rate can affect the lira value of the position and the cash plan. The effect on margin should be assessed separately, together with lira costs.
Measurement routine
- A table by currency: Euro, dollar and other currencies separately; cross-currency risk is seen separately.
- Maturity buckets: 0–1 month, 1–3 months, 3–6 months, 6–12 months. Near-term flows are more certain.
- Update frequency: At least monthly; weekly when exchange rates are volatile.
- Ownership: Sales feeds expected collections, purchasing expected payments, finance the loan schedule.
Hedging decisions
Hedging does not have to eliminate the whole position. A written policy should answer these questions:
- What proportion of the balance sheet position and of the forecast position will be hedged?
- Up to what horizon?
- Which instruments may be used? For example forward contracts, options or natural hedging (foreign currency costs or debt matched against foreign currency revenue).
- Who has approval authority, and what are the limits?
- How will results be reported?
The cost of derivatives, collateral requirements and contract terms should be assessed separately with the bank. Accounting for derivatives (including hedge accounting for entities applying TFRS) is a separate technical topic and should be considered when setting the policy. No hedging strategy guarantees to remove the full effect of exchange rate movements; the aim is to know the limits of the effect in advance.
The pricing and contract side
Currency risk is not only a matter for the finance team:
- Price list: How often are foreign currency prices updated? If the lira part of costs rises with inflation, the margin narrows on products whose foreign currency price stays fixed.
- Quotation validity: For long-valid quotations, write down the exchange rate and cost assumptions.
- Collection terms: The longer the term, the longer the position stays open.
Common mistakes
- Looking only at the balance sheet position: Orders and purchases over the coming months are left out.
- Assuming a foreign currency loan is a natural hedge: If the loan’s maturity and amount do not match the timing of foreign currency revenue, it may not be a hedge, or only a partial one.
- Deciding on an exchange rate forecast: The policy should rest on limiting the effect, not on predicting the direction of the rate.
- Tracking results apart from the margin: Exchange differences and hedge results should be read together with the operating margin.
What it means for management
For an exporter, currency risk is a natural part of the business. The part under management’s control is to measure the position regularly, know the sensitivity and tie hedging decisions to a written policy. This framework means that when exchange rates move, decisions are more likely to be taken by rules set in advance rather than in a panic. To read this together with high inflation, see management reporting under high inflation.
This article does not recommend a particular financial instrument or transaction. Turkish rules on export proceeds and foreign currency borrowing can affect a company’s currency position; the rules in force should be checked separately. Seek advice from the bank and specialists on derivative transactions and their accounting. Method: This article is professional analysis; it makes no claim that rests on legislation, a provision of a standard or statistics.
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