Foreign Exchange Risk Management: A Comprehensive Guide for 2025

Foreign exchange (FX) risk management is a critical aspect of financial and treasury strategy for global businesses. For CFOs and treasury managers, especially those navigating the complexities of multi-subsidiary operations across borders, understanding and mitigating FX exposure is crucial to ensuring continuity of operations and financial predictability. Having a robust plan in place for how to safeguard the business from currency fluctuations is therefore key for long-term success.

In this guide, we explore FX risk, its types and causes and the common challenges faced by multi-subsidiary organisations, as well as proven strategies for effective risk management in 2025.

FX risk, alternatively called exchange rate risk or currency risk, refers to the potential financial losses from the fluctuations in exchange rates. It means that when holding or transacting in foreign currencies, any fluctuations in the values can impact earnings, cash flows and long-term financial health.

Currency risk has multiple causes, both internal and external. The biggest driver is obviously the currency volatility stemming from geopolitical factors, inflation, changes to currency policies and macroeconomic shifts. Related to that are interest rate fluctuations that can impact the supply and demand of particular currency pairs. In recent years we have also seen the impact of global events such as COVID-19, Brexit, or the Ukraine war disrupting the supply chains and amplifying the FX volatility.

There are a few main types of currency risk - transaction, economic, translation and liquidity risk, and each will have a different cause and impact on the business:

Transaction risk occurs when there is a delay between initiating and settling a transaction in a foreign currency. For example, a US-based business may face losses if their home currency, the dollar, weakens against the pound when buying goods from a UK-based supplier before the payment is settled.



Translation risk becomes apparent when companies consolidate the financials of their subsidiaries operating in different regions. Because of the exposure to various currencies, the resulting volatility, consolidating financial data can reveal significant differences in cash position. As a result, compliance, long-term strategy and investor relations can be negatively impacted. This type of risk becomes particularly pronounced when companies have entities in emerging markets, regions experiencing geopolitical instability or ones with diverging reporting periods.



Economic FX risk is a reflection of how the exchange rate movements impact a company's market value and competitiveness. For businesses operating in multiple regions, this means that the competitive position of subsidiaries in respective markets can change, but also, the overall strategy around market entry, pricing and supply chain need to be monitored and revised.

Liquidity risk occurs when FX volatility impacts cash flow and a company's ability to meet their financial obligations such as paying off loans or paying suppliers.

Managing FX risk goes beyond mitigating potential losses, be it financial or reputational. CFOs and treasury managers, especially those working in multi-subsidiary global businesses, should pay attention to currency risk and develop strategies to mitigate it to enhance the long-term stability and profitability of the business. The lower the costs associated with currencies going up and down, the better it is for the bottom line.

Additionally, a robust FX management strategy improves financial predictability, allowing for planning and continuous growth of the business. Hand in hand with that goes improved stakeholder confidence who will view proactive risk management as an asset and will be more likely to further support and invest in the business.

For companies with multiple entities, exchange rate risk becomes more complex as it encompasses diverse market conditions in different regions, a complex web of intercompany transactions and regulatory environments. Multi-subsidiary businesses need to coordinate treasury operations across multiple time zones while maintaining visibility over the entire group's currency exposure.

Complex Cash Management Structures and Silos

Diverse cash flows across multiple entities and currencies lead to little oversight of the FX exposure and the real impact of the currency volatility. It may appear that the particular entity is not affected; however, on the group level, the business will be exposed to a significant translation risk.

This is often due to disjointed financial systems across subsidiaries that give no unified, real-time view of cash positions and FX exposures which leaves the business vulnerable.

Liquidity Management

Effective liquidity management becomes a complex matter when multiple currencies are involved. Common liquidity challenges include cash pooling arrangements in different jurisdictions, managing banking relationships in multiple countries and maintaining optimised working capital across the group.

Internal and External Transfers

Transaction risk is also a very prominent issue for multi-subsidiary businesses given the volume and complexity of their internal dealings that need to be managed at the same time as external, commercial transactions. For example, when a UK-based parent company's Australian subsidiary trades with its Singapore-based sister company, the transaction creates multiple points of currency exposure that affect both subsidiary-level and consolidated group performance.

Inaccurate Forecasting

Lack of accurate and real-time visibility of cash positions and cash flows across subsidiaries can hinder planning and forecasting. Firstly, aggregating data from multiple entities and their systems to then consolidate it becomes a tedious and inefficient task and, secondly, inability to rely on up-to-date information produces inaccurate results. With no medium or long-term forecasting, businesses are exposed to more FX volatility and poor hedging strategies.

Resource Constraints

While treasury becomes more of a strategic priority amongst many businesses, treasury teams are often small and lack the tools or expertise to manage complex foreign currency risk effectively.

The following key practices outline how to future-proof your approach and mitigate currency risk effectively in the coming months and beyond:

Define a Comprehensive FX Policy

A robust FX policy serves as a framework for finance and treasury teams for managing currency exposures and aligning hedging strategies. Within the policy, you should outline the key currency pairs in which your business is operating along with the acceptable levels of risk tolerance. From the denominations used for transfers and operations, define the ones with the highest impact on financial performance.

Don't forget though: with market conditions constantly evolving, FX policy should be periodically reviewed, updated and distributed among the team.



Centralise Treasury Operations for Real-Time Insights

Consolidating financial data from all subsidiaries into a single, centralised system improves visibility of FX exposures and allows businesses to address them appropriately. While multi-subsidiary treasury operations are inherently complex, establishing regional treasury centres aligned with major time zones and implementing standardised processes and policies across the group can greatly consolidate the operations.

Using modern treasury and cash management tools that connect to the business's enterprise resource planning (ERP) systems and banking partners will help consolidate cash flow data and unlock insights to identify risks.



Leverage Technology

Whether within your treasury and cash management tool or as a separate system, make use of innovative FX management solutions to automate exposure analysis, hedge tracking, and compliance reporting. With the right technology, you will be able to make better and timely decisions with real-time data, collaborate across subsidiaries and get wider market insights for predictive analysis.



Adopt Hedging Strategies

Hedging strategies are a critical tool each multi-subsidiary business should leverage to lower FX exposure. Hedging uses financial instruments such as forward contracts, options or swaps to minimise exposure and guarantee more favourable rates.



Focus on Cash Flow Forecasting

Improving accuracy of cash flow forecasting is a must for long-term exchange risk mitigation strategy. It helps to develop subsidiary-level and group-wide policies and ensure overall financial health of the business. The most recommended model is cash flow-at-risk (CFaR) that allows quantification of potential losses under various scenarios.



Prepare for Unforeseen Events

Regardless of planning and mitigation strategies, currency volatility is unavoidable. Therefore, businesses should always have a contingency plan and enough liquidity to address unforeseen circumstances such as disruptions to the supply chain or major currency shocks. When operating in an unstable geopolitical region, it is advisable to monitor the situation to anticipate risk.

Effective FX risk management in multi-subsidiary businesses requires a comprehensive approach that combines strategic planning, leverages technological innovation, and implements robust operational frameworks, while maintaining a watchful eye on the wider market trends. With appropriate strategies in place and the help of modern treasury and cash management solutions such as Fyorin, organisations can minimise currency volatility while maintaining operational efficiency across their global operations.

Fyorin is working with multi-subsidiary global businesses to deliver a unified, innovative treasury and cash management tool that encompasses liquidity, FX and automation solutions. From one platform, you can access a 360-degree visibility of cash flow and cash position across the entire group and all subsidiaries, extract rich data for accurate forecasting, and most importantly, make cost-effective, inter- and intra-company transfers either along local payment rails or by leveraging our hedging tools.

Interested to find out more? Send us an email to [email protected] to schedule a free consultation.