When involved with trading goods and services across borders, businesses are impacted by currency exposure risk. For instance, an Australian based business buying goods from Germany has exposure risk, as if the value of the Australian Dollar falls against the Euro, their costs will increase.

This is not a significant issue if those increased costs can be passed straight on to the clients, but generally sale prices are sticky and can only be changed on a periodic basis. To do otherwise risks becoming uncompetitive and losing market share.

As a result, most businesses involved in trading across borders, will have to absorb some cost fluctuations from currency movements, which means gross profit margins will change month to month.

The way to mitigate against this risk is with a risk management plan that aims to fix an exchange rate, giving certainty of what the cost of goods sold (COGS) will be into the future.

Did this answer your question?