What is Foreign Currency Risk?
Foreign currency risk, also called FX risk or exchange rate risk, is the potential for financial loss resulting from unfavorable movements in exchange rates. It affects companies with cross-border revenues, costs, assets, or liabilities and breaks down into transaction risk, translation risk, and economic risk.
How It Works
- Transaction risk: contracted future cash flows in foreign currency.
- Translation risk: foreign-currency-denominated subsidiaries translated into the reporting currency.
- Economic risk: long-term impact of FX moves on competitive position and demand.
- Hedging tools: forwards, futures, options, currency swaps, and natural hedging.
- Apply hedge accounting under IFRS 9 to align P&L recognition with the hedged item.
Saudi Context
Saudi importers, exporters, and multinationals manage FX risk despite the SAR’s USD peg, because exposures to EUR, GBP, JPY, INR, CNY, and other free-floating currencies remain. Saudi banks (Al Rajhi, SNB, Riyad, ANB) offer competitive FX forwards and structured hedging. The SAR’s peg means USD exposures often need only minimal hedging.
Example
A Saudi distributor commits to pay JPY 50,000,000 in 90 days. Current spot rate is JPY/SAR 0.0265 (so JPY 50m = SAR 1.325m). A 90-day forward locks the rate at 0.0270, ceiling the cost at SAR 1.350m. Without the hedge, a yen rally to 0.0285 would cost SAR 1.425m, an extra SAR 75,000.