What FX exposure means
A business has FX exposure whenever an amount it will pay, receive, own or report is set in a currency other than its reporting currency. For a UK company that reports in sterling, a supplier invoice of USD 100,000 is a fixed number of dollars but an uncertain number of pounds. The gap between the pounds expected today and the pounds actually paid on the day is the risk.
Exposure is not the same as loss. A rate can move either way, so an open position can end up cheaper or dearer than planned. What exposure measures is how much of the business is open to that movement, and when.
For a short introduction to the wider idea, see what currency risk is.
The three types of FX exposure
Transaction exposure
Transaction exposure comes from known cash flows in a foreign currency: invoices to pay, sales to collect, loan repayments, dividends. It has an amount and a date, which makes it the easiest kind to measure and the one most finance teams start with. Most of this page is about transaction exposure.
Translation exposure
Translation exposure arises when a group consolidates a subsidiary, asset or liability held in another currency. A euro subsidiary worth EUR 2,000,000 is reported at a different sterling value each period as EUR/GBP moves, even if no cash changes hands. It affects reported net assets and covenants rather than day-to-day cash.
Economic exposure
Economic exposure is the longer-term effect of exchange rates on competitiveness. A UK exporter competing with US firms can lose orders when sterling strengthens, even if it invoices in pounds. It is real but hard to put a single number on, so it is usually described in words and scenarios rather than in a table.
How to list exposures by currency
A practical exposure list has one row per expected flow, with five facts:
- Currency, for example USD or EUR.
- Direction, paying out or receiving in.
- Amount in that currency.
- Expected date, or the month if the exact day is not known.
- Status, for example committed (invoice or contract exists) or forecast (expected from history or budget).
Recurring flows, such as a monthly EUR payroll, can be entered once as a pattern and expanded into monthly rows. Keeping committed and forecast flows apart matters, because forecasts can change and many businesses treat them differently in a policy.
The FX exposure guide walks through this list in more detail, and the free FX exposure calculator builds it without an account.
Gross and net exposure
Gross exposure adds up everything in a currency regardless of direction. Net exposure offsets payments against receipts in the same currency and over a similar period.
If a business pays USD 500,000 and receives USD 200,000 in the same quarter, gross USD exposure is USD 700,000 and net exposure is USD 300,000 payable. The net figure shows how much would be open if the receipts can be used to fund the payments. The gross figure shows the total size of activity, which matters when receipts and payments fall in different months or in different entities.
Netting only works where timing and control line up. Dollars received in December cannot fund a payment due in March unless they are held until then, and dollars held by one subsidiary do not offset a payment due from another unless the group moves them.
Why timing matters
Two exposures of the same size are not the same risk if one is due next week and the other in nine months. Rates have more time to move over a longer period, and forecast flows further out are less certain. Grouping exposure into time buckets (this month, next quarter, next 12 months) shows where the open amounts sit and what is coming up soonest.
Worked example (illustrative)
The figures below are hypothetical, chosen to keep the arithmetic simple. They are not a forecast.
A UK distributor reports in sterling. Over the next quarter it expects:
| Flow | Currency | Direction | Amount |
|---|---|---|---|
| Supplier invoices | USD | Paying | 500,000 |
| Customer receipts | USD | Receiving | 200,000 |
| Supplier invoices | EUR | Paying | 300,000 |
Step 1, net by currency. USD net is 500,000 minus 200,000, so USD 300,000 payable. EUR net is EUR 300,000 payable. Gross exposure is USD 700,000 and EUR 300,000.
Step 2, value at planning rates. At an assumed GBP/USD of 1.25, USD 300,000 costs £240,000 (300,000 ÷ 1.25). At an assumed EUR/GBP of 0.85, EUR 300,000 costs £255,000 (300,000 × 0.85). Total open exposure is £495,000.
Step 3, apply a rate move. If GBP/USD falls to 1.20, the USD payment costs £250,000 (300,000 ÷ 1.20), which is £10,000 more. If EUR/GBP rises to 0.88, the EUR payment costs £264,000 (300,000 × 0.88), which is £9,000 more. Together that is £19,000 against a planned £495,000.
| Currency | Net payable | At planning rate | At moved rate | Difference |
|---|---|---|---|---|
| USD | 300,000 | £240,000 | £250,000 | £10,000 |
| EUR | 300,000 | £255,000 | £264,000 | £9,000 |
| Total | £495,000 | £514,000 | £19,000 |
The same moves in the other direction would reduce the cost by a similar amount. The point of the exercise is to know the size of the swing, not to predict which way it goes. How to read FX risk numbers explains ranges like this in more depth.
Turning the list into a report
Once exposure is listed and netted, a short report usually covers:
- Open exposure by currency in sterling at a stated rate and date.
- How much is already covered by forward contracts or other instruments.
- The range of outcomes for a stated rate move.
- What falls due in the next 30 days.
That report is the starting point for FX risk management, and the instruments a business may use to cover part of it are set out in FX hedging explained. You can also set a free rate alert to get an email when a currency pair reaches a level you care about.