Foreign exchange (FX) risk is one of the few financial risks faced daily by UK businesses that trade internationally. Their instinctive response is often to manage it actively, reducing sensitivity to currency movements and removing uncertainty wherever possible. That instinct isn’t necessarily wrong, but active FX management is most effective when it is executed as a strategic methodology, rather than a blanket approach.
Too often, the real cost of managing FX is overlooked by businesses. That cost is not only in the headline spread or the forward points, but the time, attention, governance and human effort required to run an active FX process properly. For many businesses, this cost is material. In some cases, it is larger than the financial benefit gained from being marginally less sensitive to FX rates.
Active FX management can be defined as having a regular plan for managing FX risk, which may include hedging strategies, and reviewing that plan on an ongoing basis. Done well, with the support of state-of-the-art digital tools, active FX management enables a business to:
Each of these steps consumes the time of treasurers and other senior finance professionals – people whose attention is already stretched across cash flow, funding, pricing, tax, regulation and strategic decisions. Yet if they were able to spend less time on active FX risk management, they could devote more time to other business priorities.
Given the inherent unpredictability of currency markets, and the fact that outcomes can only ever be judged with hindsight, it is impossible to know at the point of execution whether the ‘right’ rate has been achieved
Active management of FX risk delivers value – to a certain degree. It helps to protect margins, stabilise cash flows and support budgeting. Yet there may be a point at which the returns start to diminish. This is usually when disproportionate human effort is invested in precision – for example, attempting to secure the optimum exchange rate when executing a trade.
“In many cases, the individual executing the trade is influenced by very human instincts – seeking to demonstrate skill, add value, or ‘beat the market’ by timing execution to secure the most favourable rate,” says Dharmesh Patel, Head of UK Transactional FX Sales at Barclays Corporate Bank. “That behaviour is entirely understandable, particularly in volatile markets where short-term moves can feel meaningful. However, for many businesses, the real priority is simply to exchange currency at a fair margin and with smooth execution, allowing them to focus on running their operations. Given the inherent unpredictability of currency markets, and the fact that outcomes can only ever be judged with hindsight, it is impossible to know at the point of execution whether the ‘right’ rate has been achieved.”
The returns of active management can also diminish when businesses try to forecast their FX risks for extended periods without knowing their likely cash flows over that time. The same applies when they substitute strategic decision-making for reactive decisions based on FX rate fluctuations. Furthermore, the savings made through active management of FX risk may not justify the time and resources involved, particularly if the business is not taking advantage of digital FX tools.
Active FX management makes sense in several important business scenarios. These include:
In all these scenarios, investing time and attention in active FX management is justified because the impact of getting it wrong is high. Yet many businesses apply the same level of focus to high-volume, low-value operational flows, repetitive supplier or payroll payments, and short-dated exposures with limited volatility impact. As a result, they only gain limited benefits from actively managing their FX risks, despite committing substantial human effort to the process. The business becomes busier without becoming meaningfully safer – often without even realising this is happening.
Many treasurers are exploring how straight-through processing can help manage their organisation’s high-volume, low-value transactions
FX maturity (a bespoke approach to FX risk management) is not about managing every possible FX risk. It’s about deciding which risks deserve attention.
Treasurers and other finance professionals charged with managing FX risk should consider these three questions when tailoring their approach:
Some exposures are best managed actively. Others can be mitigated effectively through operational efficiency, even if that means accepting slightly more FX rate sensitivity. “Many treasurers are exploring how straight-through processing can help manage their organisation’s high-volume, low-value transactions,” says Patel.
“Straight-through processing enables automated payment reconciliation, which saves time and reduces costs by removing the need to manage FX risk across multiple currency accounts.”
Treasurers do not need to choose between active FX management and a focus on operational efficiency. They can apply both strategies to a greater or lesser extent, in different parts of their business, depending on requirements. Banks can consult with treasurers to highlight where active FX management is likely to add the greatest value to the business and where it would be more appropriate to improve cross-border payment efficiency instead – for example, by integrating FX with mass payments. They can also outline the features of different FX risk management products and explain their degree of appropriateness for the business.
Another way that banks can support treasurers is by outlining how digital tools can improve the efficiency, security and speed of their FX risk management. Convenient digital FX tools enable businesses to make FX payments quickly and easily via a highly secure process, instead of having to call up and place an FX trade over the phone.
When FX risk is genuinely strategic – by determining whether a business is profitable – it makes sense to invest in a more active approach to risk management
According to Patel, the most effective FX strategies are not the most complex, but the most selective. “When FX risk is genuinely strategic – by determining whether a business is profitable – it makes sense to invest in a more active approach to risk management,” he says. “By contrast, where the focus is on operational efficiency, simpler, day-to-day FX payment strategies may be more appropriate. Ultimately, it is about being deliberate: choosing where FX matters most and where to invest time and resources accordingly.”
Overall, an effective FX strategy is about managing material FX risks, simplifying low-value operational risks, and freeing up treasury and finance teams to focus on decisions that genuinely move the business forward. In FX, maturity is not about doing more, it’s about knowing where precision stops paying.
Barclays Bank PLC is registered in England (Company No. 1026167) with its registered office at 1 Churchill Place, London E14 5HP. Barclays Bank PLC is authorised by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority (Financial Services Register No.122702) and the Prudential Regulation Authority. Barclays is a trading name and trade mark of Barclays PLC and its subsidiaries. Find out about the Financial Services Register.