Article written by Marketing Team
Export-oriented SME, NGO active internationally, group with subsidiaries in the eurozone or dollar denominations: wherever a financial flow involves a foreign currency, foreign exchange risk enters your management picture. Often underestimated, sometimes entirely overlooked, it can nonetheless quietly erode your margins, project budgets or equity. This article helps you understand its mechanisms, identify your zones of vulnerability and develop the right reflexes to protect every franc.
What exactly are we talking about?
Foreign exchange risk refers to the possibility that a change in a currency’s exchange rate will affect the value of your revenue or expenses. It manifests whenever a financial flow involves a currency other than the Swiss franc: payment of a supplier in euros, invoicing a customer in dollars, transfer of funds to an overseas office in local currency, or receipt of a grant denominated in a foreign currency.
This risk concerns SMEs importing components or exporting products as much as NGOs financing projects abroad, or corporate groups consolidating subsidiaries across multiple currency zones. The common denominator: a mismatch between the currency in which you plan and the currency in which you operate.
The Swiss franc, a strength that can become a burden
Switzerland benefits from a structurally strong currency. Over the long term, the franc appreciates against most currencies. That is excellent news for the purchasing power of Swiss residents, but it presents an ongoing challenge for any organisation whose revenue or expenses depend on foreign currencies.
The most striking episode remains 15 January 2015, when the Swiss National Bank abandoned the exchange rate floor of 1.20 CHF per euro. Within hours, the franc appreciated by nearly 30%. Export-oriented SMEs saw their margins evaporate overnight. Geneva-based NGOs had to slash operational budgets. UNHCR, for example, had to cut its global budget by 190 million dollars. Smaller organisations were forced to freeze recruitment or reduce field operations.
More recently, divergent monetary policies between the SNB, the ECB and the Federal Reserve, geopolitical tensions and economic uncertainties continue to cause significant foreign exchange movements. For an SME where 40% of turnover comes from the eurozone, a 5% appreciation of the franc can represent the equivalent of several positions or a deferred investment. For an NGO where 70% of expenditure is in foreign currencies, an entire programme component can be cut.
The three faces of foreign exchange risk
Transaction risk
This is the most immediate. It appears between the moment an undertaking is made (order, contract, funding agreement) and the moment payment is actually made. If the franc strengthens between these two dates, the CHF counter-value of your foreign currency revenue decreases, or the CHF cost of your foreign currency expenses increases. For an SME invoicing in euros with a 60-day payment period, as for an NGO transferring funds three months after receiving them, this timing gap creates a window of exposure.
Conversion risk
This concerns the translation into Swiss francs of the financial statements of foreign entities, whether a commercial subsidiary or field office. Even without movement of funds, the change in exchange rates between two reporting dates modifies the value of assets, liabilities and results in consolidated accounts. Under Swiss GAAP RPC 30, these translation differences are recorded in equity, which can affect the apparent strength of your balance sheet.
Economic risk
The most insidious. It affects competitiveness and long-term viability of your organisation. If the franc appreciates durably, your head office costs (salaries, rent, infrastructure) increase in relative terms compared to your foreign currency revenue or activities. For an SME, this erodes price competitiveness against competitors in the eurozone. For an NGO, it is the very structure of the relationship between administrative costs and programme expenditure that becomes unbalanced.
The interbank rate: your reference guide
When you carry out a foreign exchange transaction, the rate offered by your bank is almost never the interbank rate (also called the “mid-market rate”). This rate, at which large financial institutions exchange currencies among themselves, is the most objective market reference. It is available in real time on platforms such as Reuters, Bloomberg or simply on financial websites. There is no legal obligation for banks to apply this rate to their clients: they are free to set their own conditions, which makes comparison all the more important on your side.
The difference between the interbank rate and the rate you actually obtain constitutes your intermediary’s foreign exchange margin. This margin can vary considerably from one institution to another, but also within the same institution, depending on the channel used (counter, e-banking, trading desk), the transaction amount, your client profile or even the time of day.
In practice, this means that two employees of the same organisation can obtain very different rates for the same currency, depending on whether they go through their branch counter or contact the bank’s foreign exchange desk directly. This reality, often unknown, warrants particular attention.
First reflex: systematically compare the rate offered against the interbank rate at that moment. A spread of 0.5 to 1% may seem insignificant, but on an annual transaction volume of CHF 500,000 in foreign currencies, it represents 2,500 to 5,000 francs of invisible additional cost.
Your trading partner: an ally to choose carefully
Whether it is your primary bank, a specialist bank or a fintech service provider, your foreign exchange partner is an essential link in your foreign exchange management. And not all partners are equal.
Before committing, take time to research. A few key questions to ask:
- What is the average spread between your rates and the interbank rate? A transparent partner will provide this information without hesitation. If they dodge the question, that is already a signal.
- Do you offer differentiated rates depending on channel or volume? Negotiating a “trading desk” rate rather than a “counter” rate can make a significant difference, especially for large amounts.
- What hedging instruments do you offer? Forward contracts, swaps, options: your partner must be able to offer you solutions suited to your profile, not just spot foreign exchange.
- What are your ancillary fees? Transfer commissions, correspondent fees, margins on automatic conversions: hidden costs can accumulate quickly.
It may also be wise to work with multiple partners and regularly compare their terms. Beyond your primary bank, specialist providers like Telexoo or b-sharpe offer online foreign exchange services with rates often closer to interbank rates than those charged at bank counters. These Swiss-regulated platforms allow you to execute foreign exchange transactions simply and transparently, with clear visibility of the margin applied. Competition, even intermittent, maintains healthy pressure on the rates charged by all your partners.
Caution: not all rates are equal, even at your own bank
This is one of the most common and least documented pitfalls. Within the same bank, several exchange rates can coexist simultaneously. The rate displayed on your e-banking platform, the rate applied to an international wire transfer at the counter, the rate negotiated by phone with the trading desk and the automatic conversion rate of your business credit card may all be different.
These differences are explained by distinct margin structures across channels, rate updates at different frequencies and varying levels of service. The result: the same transaction, executed via two different channels on the same day, can cost significantly more or less.
In practical terms, here is what this means for your organisation:
- Centralise your foreign exchange operations. Designate a person or department responsible for all conversions, rather than allowing each department to handle its own transactions.
- Prioritise the most competitive channel. For significant amounts (from CHF 10,000), systematically contact the foreign exchange desk or trading room of your bank rather than going through e-banking.
- Document your rates. Keep a record of the interbank rate at the time of each transaction so you can calculate the margin actually applied and compare over time.
- Avoid automatic conversions. Automatic conversions on multi-currency accounts or business credit cards often apply higher margins than directly negotiated rates. Prefer manual and planned conversions.
Five reflexes to regain control
Whatever the size of your organisation, these five reflexes form the foundation of sound foreign exchange risk management.
- Measure your net exposure. For each currency, calculate the balance between your expected revenue and expenses. This is the starting point for any foreign exchange strategy.
- Simulate the impact of a 5% or 10% variation. This simple sensitivity exercise allows you to measure the stakes in francs and decide whether a hedge is necessary.
- Stay close to the interbank rate. Make it your systematic reference. Compare every quoted rate to the mid-market rate, and do not hesitate to negotiate.
- Reduce the time lag. The longer the delay between receipt of funds and their use in foreign currency, the greater the exposure. Accelerating transfers is often the simplest and most effective measure.
- Elevate the issue to strategic level. Foreign exchange risk should not remain confined to the accounting department. It deserves a clear policy, validated by management or the board, with defined tolerance thresholds and procedures.
A matter of transparency and governance
Foreign exchange risk is not only an internal management problem. It is also a question of transparency towards your stakeholders. For an NGO, foreign exchange losses appear in the financial result and may raise questions from donors or the audit body. For an SME, they directly impact profitability and must be communicated to shareholders. For a group, translation differences can significantly alter the image of consolidated equity.
Integrating foreign exchange risk into your internal reporting, into your annual reports and into your governance discussions demonstrates responsible and professional financial management. It is also the best way to avoid unpleasant surprises at year-end.
Awareness is already action
Foreign exchange risk is an integral part of the financial reality of any Swiss organisation operating internationally. Ignoring it means accepting that precious resources evaporate silently with every market fluctuation. Being aware of it means giving yourself the means to act: by measuring your exposure, choosing the right partners, remaining vigilant about rates charged and integrating foreign exchange into your decision-making processes.
The first step costs nothing: identify your foreign currency flows over the past twelve months, compare the rates obtained to the interbank rate, and measure what those spreads actually cost your organisation. The result could well change the way you approach your next foreign exchange transaction.
This article is intended for information purposes only. It does not constitute investment advice or a financial recommendation. Companies mentioned are cited for illustrative purposes. We recommend consulting a qualified professional for any decision relating to the management of your foreign exchange operations.