How to hedge the euro exchange rate in your business: practical guide for importers and exporters

The euro exchange rate can affect the cost of goods, the value of an invoice from an overseas supplier and a company’s actual profit margin. For businesses making regular settlements in EUR, even a small movement in EUR/PLN can have a noticeable impact on the company’s budget.

Hedging the euro exchange rate means agreeing the terms of a future currency settlement in advance. It is not about predicting the market or trying to secure the best possible rate. Its purpose is to create greater certainty around the costs, revenue and margins connected with a specific commercial transaction.

What does hedging the euro exchange rate involve?

A business that knows it will make a future payment to a supplier in EUR, or receive a payment in euros, can agree the exchange rate in advance.

This means that, already at the planning stage, the business knows the PLN value of a future payment or receipt. It helps reduce uncertainty caused by changes in EUR/PLN between signing an agreement, issuing an invoice and settling it.

The euro exchange rate can be influenced by many factors, including central bank decisions, inflation data, economic performance and geopolitical developments. Find out more in What affects exchange rates? 7 key factors for businesses.

When is a business exposed to euro exchange-rate risk?

Exchange-rate risk arises when a business agrees the terms of a transaction at one point in time, but the payment or receipt in EUR takes place later. The exchange rate may change in the meantime.

Importers

Importers buying goods, materials or services in euros are typically exposed to the risk of EUR/PLN rising. If the euro becomes more expensive before the payment date, the business needs more Polish zloty to pay the same amount in EUR.

For example, a company has an invoice of EUR 100,000 to pay. At an exchange rate of PLN 4.25, the payment costs PLN 425,000. If the rate rises to PLN 4.35 before settlement, the same invoice costs PLN 435,000.

That is a difference of PLN 10,000. It may reduce the planned margin or increase the cost of fulfilling an order.

Exporters

Exporters receiving payments in EUR usually face the opposite risk. If the euro weakens against the Polish zloty before the payment is received, the business will obtain less PLN on exchange than it assumed when pricing the contract.

For example, a company expects to receive EUR 100,000 and has budgeted the transaction at PLN 4.30. The expected value of the payment is PLN 430,000. If the rate falls to PLN 4.20, the value drops to PLN 420,000 – PLN 10,000 less.

For businesses operating on tight margins or settling regular payments in euros, this difference can have a real impact on financial results.

When does it make sense to hedge the euro exchange rate?

Hedging the euro exchange rate may be particularly useful when:

• the business knows the amount and date of a future EUR payment or receipt,
• the terms of a commercial contract have already been agreed,
• the exchange rate may materially affect the profitability of the transaction,
• the company regularly buys or sells goods and services internationally,
• the business needs greater certainty around future costs and receipts,
• the margin on a transaction leaves little room for an unfavourable exchange-rate movement.

Not every currency exchange requires an exchange rate to be agreed in advance. However, it is worth considering when the amount, timing or importance of a transaction is greater.

Hedging the euro exchange rate versus spot currency exchange

For an immediate payment, a business can use online currency exchange at the current market rate. This approach works well when funds are needed straight away or when the settlement date is very close.

Agreeing an exchange rate in advance serves a different purpose. It applies to a future, identifiable payment or receipt related to business activity. The company agrees the rate, amount and settlement date earlier, allowing it to plan the PLN value of the transaction more effectively.

In practice, both solutions can complement each other. Currency exchange supports day-to-day settlements, while agreeing an exchange rate in advance helps businesses plan more significant or regular commercial transactions.

How does Term work at AFORTI.BIZ?

At AFORTI.BIZ, businesses can agree an exchange rate for future commercial settlements through the Term service.

The solution is designed for companies making genuine payments or receiving receivables in foreign currencies. It helps limit the impact of unfavourable exchange-rate movements on budgets, planned costs and transaction margins.

The process can be described in four steps:

1. The business identifies a future commercial transaction to be settled in a foreign currency.
2. The currency, amount and future settlement date are agreed.
3. The exchange rate is agreed at the time the transaction is concluded.
4. On the selected date, the business settles the payment or receipt under the previously agreed terms.

With Term, a business can agree an exchange rate for a selected future settlement date – up to 12 months ahead. This supports more effective planning of purchasing costs, future receipts and the profitability of contracts settled in EUR or other foreign currencies.

What does agreeing an exchange rate in advance offer a business?

The key benefit is not trying to “time” the market. It is greater predictability.

Agreeing an exchange rate in advance can help a business:

• price an offer or contract more accurately,
• limit the effect of an unfavourable exchange-rate movement on planned margins,
• plan its budget more precisely,
• reduce uncertainty around future payments and receipts,
• manage cash flow more effectively,
• make business decisions without constantly reacting to current market movements.

It is important to remember that the market may later move in either a favourable or unfavourable direction. Agreeing an exchange rate in advance is therefore not intended to maximise returns from currency movements, but to limit the risk connected with a specific commercial settlement.

How can a business prepare to hedge the euro exchange rate?

Before considering exchange-rate protection, it is worth gathering the key details of the planned transaction:

• the amount to be settled in EUR,
• the expected payment or receipt date,
• the type of commercial transaction,
• the exchange rate used in the budget or contract calculation,
• the level at which the exchange rate begins to affect the profitability of the transaction.

This preparation makes it easier to assess whether agreeing an exchange rate in advance could help reduce uncertainty around the future settlement.

For businesses making regular payments in euros, it is also useful to monitor the factors that can affect EUR/PLN, including central bank decisions, inflation data, economic developments and geopolitical events.

Frequently asked questions about hedging the euro exchange rate

Is hedging the euro exchange rate suitable for every business?

Not always. It can be most relevant for businesses that know the amount and date of a future EUR payment or receipt, and where an exchange-rate movement may affect the transaction cost, revenue or planned margin.

What happens if the market moves in a favourable direction after the rate is agreed?

The purpose of exchange-rate protection is not to achieve the best possible outcome compared with the future market rate. The key benefit is predictability: the business knows the terms of its future settlement and can account for them in its budget and contract calculations.

How far ahead can an exchange rate be agreed?

With the Term service, an exchange rate can be agreed for a selected future settlement date, up to 12 months ahead.

Summary

Hedging the euro exchange rate can help businesses limit the effect of EUR/PLN movements on costs, revenue and margins. It can be particularly useful for future payments or receipts where the amount and settlement date are known in advance.

For importers, it means greater control over the cost of purchases in EUR. For exporters, it offers greater predictability of the PLN value of future receipts. In both cases, the aim is not to predict the market, but to prepare the business more effectively for its movements.

Making or receiving payments in EUR? Explore Term – the AFORTI.BIZ service designed to help businesses agree an exchange rate for future commercial transactions.

This material is provided for educational and informational purposes only. It does not constitute investment advice, a recommendation or an invitation to enter into any transaction.