FX exposure

Exposure typically falls into three categories: transaction exposure (a specific, dated payable or receivable, such as an invoice due in 60 days), translation exposure (the accounting effect of converting a foreign subsidiary's results into GBP for consolidation), and economic exposure (the longer-term effect of currency movements on competitiveness, such as a UK exporter becoming relatively more expensive if sterling strengthens). Most UK SMEs are principally concerned with transaction exposure.

Mapping exposure means listing every recurring or known foreign-currency cashflow by currency, amount and expected settlement date. This produces a simple ladder — for example, €40,000 due in 30 days, €35,000 due in 60 days — which is the input needed to decide whether, and how much, to hedge. Without this map, hedging decisions are typically reactive and inconsistent.

The size of exposure that matters is net exposure per currency and period, not gross activity. A business that both pays USD suppliers and receives USD customer revenue in similar amounts and timeframes may have relatively low net exposure, even though its gross USD turnover is high — netting these flows internally (for example, through a multi-currency account) can reduce the amount that needs to be hedged or converted at all.

Exposure is dynamic: it changes as new orders are placed, existing ones are fulfilled, and currency mix shifts with the business. A one-off exposure map quickly goes stale, which is why providers typically recommend reviewing it on a regular cycle rather than treating it as a single exercise.