Imagine this — you invoice a US client for $10,000, but by the time the payment arrives, the rupee has strengthened, and you receive less in INR. That loss due to currency fluctuations is called foreign exchange risk. Simply put, foreign exchange risk is the possibility of losing money due to changing exchange rates.
With increasing global trade, volatile markets, and ongoing currency uncertainty, this risk now affects everyone — from SaaS exporters to freelancers and e-commerce sellers.
Continue reading this guide to learn what foreign exchange risk means, the main types of foreign exchange risk exposure, and how you can effectively manage or reduce it in your business.
Key Takeaways
- India does not use IBAN numbers for banking, so you do not need one to receive international payments.
- To get paid from overseas, you simply provide your bank account number, account name, branch details, and the correct SWIFT code.
- This article has listed the primary SWIFT codes for major banks like HDFC, ICICI, and SBI, which are sufficient for most international transfers.
- If you want a simpler and faster way to receive global payments without worrying about SWIFT or IBAN formats, Razorpay offers an easier alternative.
What Is Foreign Exchange Risk? (or Currency Risk)
Foreign exchange risk (or FX risk) is the potential loss you face when exchange rates move unfavourably between the time you agree on a payment and when you actually receive it.
While people often use “foreign exchange risk” and “currency risk” interchangeably, there’s a subtle difference.
- Currency risk is a broader term that refers to any financial exposure arising from currency fluctuations.
- Foreign exchange risk is specifically tied to international business transactions — when money moves across borders, and you’re converting from one currency to another.
Let’s revisit the earlier example to make this clear.
You invoice a US client $10,000 when the exchange rate is ₹84 per USD.
- Expected payment: $10,000 × ₹84 = ₹8,40,000
But by the time your client pays, the rupee strengthens to ₹82 per USD — meaning you receive ₹8,20,000 instead of ₹8,40,000, a direct loss of ₹20,000.
And this isn’t just a “cost of doing business.” It directly reduces your earnings and makes it harder to plan your cash flow. For a growing business, even small currency changes can disrupt budgets, delay payments, and affect future growth plans.
In recent years, foreign exchange risk has become more unpredictable due to geopolitical tensions, rising inflation, and interest rate differences between major economies. These factors cause currencies like the rupee to fluctuate sharply, directly impacting how much you finally earn from international payments.
Main Types of Foreign Exchange Risks
Businesses face three main types of foreign exchange risk exposure: Transaction risk, translation risk, and economic risk. Each affects your finances differently, but transaction risk is the most immediate, as it directly impacts your cash flow and profit with every overseas payment.
1. Transaction Risk
Transaction risk arises when the exchange rate changes between the time you send an invoice and when you receive the payment. This type of risk is most critical because it affects your real earnings and can reduce your profit margin or disturb your cash flow.
For example, if you invoice a client for $1,000 at ₹84 per USD, you expect ₹84,000. If the rate drops to ₹82, you’ll receive ₹82,000 — losing ₹2,000 simply due to currency fluctuation.
2. Translation Risk
Translation risk is an on-paper risk that affects how your company’s finances appear when you consolidate accounts from different countries. It doesn’t affect your actual cash flow, but it can change how your profit or assets look in reports.
For instance, an Indian SaaS company with a Singapore branch must convert its earnings from SGD to INR for reporting. If the Singapore dollar weakens, the company’s total revenue appears smaller in rupees, even though its operations performed well.
3. Economic Risk (or Operating Risk)
Economic risk is a long-term type of foreign exchange risk showing how currency changes can affect your overall competitiveness, pricing, and growth in global markets.
For example, if the rupee strengthens against the dollar, your products or services become more expensive for international clients, making it harder to compete with companies from weaker-currency countries.
Explore Razorpay’s Global Payment Solutions
Comparison: Types of Foreign Exchange Risk
| Type | What It Affects | When It Occurs | Who It Impacts Most |
| Transaction Risk | Actual payments and receipts | Between invoicing and payment | Freelancers, exporters, SaaS startups |
| Translation Risk | Financial reporting and balance sheets | During the consolidation of foreign accounts | Businesses with overseas subsidiaries |
| Economic Risk | Competitiveness and market strategy | Over time, as currencies fluctuate | Growing exporters and SaaS firms |
Did You Know?
In 2023, many Indian importers and exporters left a larger share of their foreign exchange exposure unhedged, relying on RBI support and a stable rupee, increasing their overall foreign exchange risk.
Guide to Foreign Exchange Risk Management Techniques
Internal & Operational Strategies
These are the simplest ways to redeal wiuce currency risk without using complex financial tools. They’re ideal for businesses that dth moderate international payments.
1. Invoicing in Your Home Currency (INR)
This is the most straightforward way to avoid foreign exchange risk. When you invoice your clients in Indian rupees, your earnings remain unaffected by changes in exchange rates. You know exactly how much you’ll receive, making your revenue predictable.
The challenge is that international clients often prefer paying in their local currency. In such cases, you can discuss flexible terms or offer small benefits (like faster delivery) to encourage payment in INR.
2. Leading and Lagging
“Leading” and “lagging” are timing strategies that help you make the most of expected currency movements.
- You lead payments — that is, collect them earlier — when you expect the rupee to weaken against the foreign currency.
- You lag payments — delay them — when you expect the rupee to strengthen.
In short, you adjust your payment timing to gain a small advantage from exchange rate trends. While you can’t always predict markets, being alert to general movements (like when the dollar is rising or falling) can help you reduce small but consistent losses.
3. Currency Netting
If your business both pays and receives money in the same foreign currency, currency netting can simplify things. Instead of converting each transaction separately, you balance the inflows and outflows first, and only exchange the remaining amount.
For example, if you’re expecting payments from a UK client and also need to pay a UK supplier, you can offset one against the other. This reduces how many times you need to convert currencies and lowers your overall foreign exchange exposure.
Financial Hedging Instruments (Traditional Methods)
When you handle larger or more frequent foreign transactions, operational tactics alone may not be enough. This is where financial hedging instruments come in. These tools help you secure a fixed exchange rate or protect yourself from sudden losses due to currency swings.
1. Forward Contracts
A forward contract allows you to lock in today’s exchange rate for a transaction that will happen in the future. It’s like signing an agreement with your bank that guarantees the same rate later — no matter how much the market moves.
This helps you plan your cash flow better, since you know exactly how much you’ll receive or pay. It’s one of the most common foreign exchange risk management techniques used by exporters and SaaS companies in India.
2. Currency Options
Currency options give you the right but not the obligation to exchange currency at a pre-decided rate. Think of it as “insurance” against unfavourable currency movement.
Example: You buy an option to sell $10,000 at ₹83 in one month.
- If the market rate drops to ₹81, you exercise the option and protect your value.
- If the rate rises to ₹85, you simply ignore the option and benefit from the higher rate.
It’s a flexible but slightly more expensive method, suitable for businesses that want protection without losing the upside of favourable movements.
Related Read: Foreign Exchange Market in India: Guide for Exporters
Why Managing Foreign Exchange Risk Is a Challenge?
Inaccessible and Complex Systems
Traditional banks and SWIFT transfers are slow and not designed to work quickly. You’re often required to fill out long forms, wait for approval, and depend on multiple intermediaries to move your money.
The lack of visibility into where your payment is or what exchange rate you’ll get makes planning difficult and increases your foreign exchange risk. Instead of focusing on clients or growth, you end up managing paperwork and waiting on approvals.
High Hidden Fees
When you receive an international transfer, several small deductions quietly reduce your earnings — intermediary bank charges, exchange rate mark-ups, and receiving fees. A few percentage points might not sound like much, but on large or recurring invoices, these losses add up. For example, on a $10,000 payment, even a 2% hidden charge means ₹16,000 gone instantly.
Cash Flow Delays
International payments rarely arrive instantly. With traditional banking routes, settlements can take anywhere between 1–5 working days, sometimes longer if there’s a holiday, compliance check, or intermediary bank delay. Each delay adds pressure when you have local expenses like salaries, rent, or vendor payments to manage.
Lack of Control and Transparency
Most traditional payment systems leave you guessing — you don’t know the exact exchange rate you’ll get, when your funds will arrive, or how much you’ll finally receive. This lack of control means the amount you finally receive often doesn’t match your invoice. It also makes it hard for you to forecast income accurately, especially if you receive frequent overseas payments.
The Modern Way to Manage FX Risk: Razorpay
Traditional banking makes foreign exchange slow, costly and unclear. Businesses need a faster, transparent and more controlled way to manage international payments — not more paperwork. This is where Razorpay International Payments changes the game. Built for modern Indian businesses, Razorpay simplifies how you accept and manage foreign payments.
With Razorpay, you can:
- Receive international payments through a single platform — no multiple bank touchpoints or manual follow-ups.
- Secure your margins with zero forex markup and live Google rates, so there are no surprises in what you finally earn.
- Avoid compliance delays with automated digital Foreign Inward Remittance Certificate (FIRC) and export documentation.
- Track every payment in real time with a dashboard that shows live exchange rates, payment status and deduction breakdowns — giving you full visibility and control.
- Open local accounts in 160+ countries and save up to 75% in transfer costs, compared to traditional wire transfers.
Grow globally without banking hassles with Razorpay
FAQs
1. What is the simplest way to reduce foreign exchange risk?
The simplest way to reduce foreign exchange risk is to invoice and receive payments in your home currency. This ensures that exchange rate fluctuations do not affect the final amount.
2. What is the difference between transaction risk and economic risk?
Transaction risk affects your actual cash flow when exchange rates change between invoicing and payment. Economic risk affects your long-term competitiveness as currency shifts make your products more or less expensive in global markets.
3. How does a small business hedge against currency risk?
A small business can hedge against currency risk by using forward contracts to lock in exchange rates, currency options to limit losses, or operational strategies to reduce exposure.
4. Can I just invoice my international clients in Indian Rupees?
Yes, you can invoice international clients in Indian Rupees if they agree. However, many foreign clients prefer paying in their local currency, so it depends on mutual agreement and convenience.
5. Does foreign exchange risk only affect large corporations?
No, it affects businesses of all sizes. Currency fluctuations can reduce your earnings, delay cash flow, and complicate financial planning — making foreign exchange risk management essential for everyone.
6. How do I calculate my foreign exchange risk exposure?
To estimate your foreign exchange risk exposure, compare the exchange rate when you issued the invoice with the rate when the payment was received.
For example:
- Invoice: $5,000 at ₹84 = ₹4,20,000
- Payment: $5,000 at ₹82 = ₹4,10,000
Your exposure (loss) = ₹10,000.
