Foreign exchange risk explained for Malaysian businesses (2026)

Key takeaways:

• Foreign exchange risk happens when currency values change between agreeing on a price and making payment, potentially causing losses.

• Businesses face three main types: transaction risk, translation risk, and economic risk.

• Airwallex offers multi-currency accounts and rate locking to help Malaysian businesses reduce foreign exchange risk and protect their profits.

Foreign exchange risk affects any business dealing in multiple currencies, creating potential losses when exchange rates move between agreeing on prices and making payments.

This guide explains the three main types of FX risk, what drives currency movements, and practical strategies to protect your business from unexpected costs. We'll also share how Airwallex can help Malaysian businesses manage these risks efficiently and save on cross-border payments.

What is foreign exchange risk?

Foreign exchange risk is the possibility that currency movements will cost your business money. For example, say you agree to buy €100,000 of goods from a German supplier. Three months later, if the euro has strengthened against the MYR, your payment will cost more than expected.

This risk affects any business dealing in multiple currencies. If you sell to US customers, buy from Chinese suppliers, or operate offices abroad, you're exposed to foreign exchange risk. The longer the gap between agreeing on a price and exchanging money, the greater your risk.

What types of foreign exchange risk affect businesses?

Businesses face different types of foreign exchange risk, depending on how they interact with international currencies. Here are the three types of foreign exchange risk to keep in mind:

1. Transaction risk

Transaction risk is the most common type of FX risk. This happens when there’s a delay between agreeing on a price and completing the payment, during which exchange rates can move against you.

For example, you order US$50,000 worth of electronics from a US supplier with 60-day payment terms.

When you signed the contract, 1 MYR bought USD 0.22, so you budgeted MYR 227,273. By payment day, the USD strengthens to 1 MYR = USD 0.21, and you now need MYR 238,095 – an extra MYR 10,822.

Transaction risk can affect:

• Import costs: Raw materials, finished goods, and equipment purchased in foreign currencies

• Export revenue: Sales made in customers’ local currencies that you convert back to MYR

• Service payments: Contractor fees, software subscriptions, or professional services billed in foreign currencies

• Loan repayments: Debt denominated in currencies other than MYR

The risk grows with longer payment terms. A 90-day payment cycle exposes you to more potential currency movement than settling within a week.

2. Translation risk

Translation risk affects how your business looks on paper, not your actual cash flow. It arises when you convert foreign subsidiaries’ or overseas branch financial statements into MYR for consolidated reporting.

For example, a Malaysian company with a Singapore subsidiary must translate its SGD assets and earnings into MYR each quarter. If the Singapore dollar weakens, the subsidiary’s value drops on your balance sheet – even though nothing has changed operationally.

Translation risk can cause:

• Balance sheet volatility: Foreign assets and liabilities fluctuate in reported value with exchange rates

• Earnings distortion: Overseas profits appear larger or smaller based on currency movements, not business performance

• Covenant pressure: Loan agreements tied to financial ratios may be breached due to currency swings alone

• Investor confusion: Reported results may not reflect your company’s true financial health

While it doesn’t immediately impact cash flow, translation risk influences how banks, investors, and credit agencies perceive your financial strength.

3. Economic risk

Economic risk is the long-term impact of currency movements on your competitive position. Unlike transaction risk, which affects specific invoices, economic risk shapes your overall business strategy.

For example, a Malaysian exporter of palm oil competing with Indonesian producers might benefit if the MYR weakens against the USD, making products cheaper for overseas buyers. But if the MYR strengthens, it may need to lower prices or risk losing customers to competitors who operate in weaker currencies.

Contingent risk is related and covers potential future transactions:

• Tender bids: Proposals for contracts you might win

• Sales pipeline: Negotiations not yet finalized

• Forecast orders: Expected future purchases from international customers

• Planned investments: Potential overseas acquisitions or expansions

Economic risk is harder to measure because it involves forecasting scenarios. Even a company with no current foreign invoices may face economic risk if a significant portion of its sales pipeline or planned investments are overseas.

What drives exchange rates and FX risk?

Exchange rates move for many reasons, and understanding these drivers can help Malaysian businesses anticipate costs and protect profits. Here are the three main factors that drive FX risk:

1. Inflation and interest rates

Inflation and interest rates are the main forces behind currency movements. When a country’s central bank raises rates to curb inflation, its currency usually strengthens because higher returns attract foreign investors.

For example, if the US Federal Reserve raises rates while Bank Negara Malaysia (BNM) keeps rates steady, the US dollar may strengthen against the MYR. Conversely, countries with persistently high inflation often see their currencies weaken over time.

For Malaysian businesses, this affects import and export costs: imported goods become more expensive when the MYR weakens, while exports can become more competitive abroad. Differences in interest rates also provide signals about potential currency trends.

2. Central banks and market expectations

Central banks influence currency values not only through policy actions but also through their communication. 

In Malaysia, BNM sets key interest rates and signals its economic outlook, which affects the MYR’s strength. At the same time, decisions by major trading partners’ central banks, like the US Federal Reserve, People’s Bank of China, or Monetary Authority of Singapore, can influence MYR exchange rates through interest rate changes and market expectations.

Currency volatility often spikes around:

• Central bank meetings: When BNM or foreign central banks announce rate decisions

• Economic data releases: Malaysian inflation, GDP, or employment figures, and those of key trading partners

• Policy speeches: Comments from central bank governors, including BNM officials

• Geopolitical events: Political developments that affect investor confidence in Malaysia or globally

For Malaysian businesses, monitoring BNM announcements alongside those of major trading partners helps anticipate periods of FX volatility and plan cross-border payments strategically.

3. Global events and trade balances

Exchange rates also respond to broader economic and political developments. Countries with large trade surpluses generally see their currencies strengthen because foreign buyers need to purchase that currency. Conversely, countries running trade deficits may experience weaker currencies.

Political and economic stability is another key factor. Currencies of countries with predictable policies and stable governments tend to hold value better. When uncertainty rises, such as during elections or policy changes, currencies often weaken as investors move toward safer assets.

For Malaysian businesses, it’s crucial to stay aware of global events, from US-China trade developments to regional political shifts. This helps you in planning cross-border transactions and managing FX risk.

How do exchange rates impact your business finances?

For Malaysian businesses trading internationally, even small currency movements can have a noticeable effect on cash flow and profitability. Here are four ways in which exchange rates may impact your finances:

1. Imports and cost of goods sold

When you purchase goods or services in foreign currencies, exchange rate changes directly affect your costs. A weakening MYR means you pay more for the same imports, which can squeeze margins unless you can pass the cost to customers.

The impact varies by category:

• Raw materials: Manufacturing businesses face immediate margin pressure when supplier currencies strengthen

• Finished inventory: Retailers see landed costs rise with unfavourable currency moves

• Equipment: Capital expenditure budgets can be exceeded by exchange rate swings

• Software subscriptions: Recurring costs in foreign currencies fluctuate monthly

2. Exports and revenue

For businesses selling abroad, currency movements influence both competitiveness and reported revenue. 

A stronger MYR makes your products more expensive to foreign buyers and reduces MYR revenue when foreign sales are converted back. A weaker MYR improves competitiveness and increases MYR revenue per foreign-currency sale.

Malaysia’s top exports include electrical and electronic products, palm oil, petroleum products, and rubber – and companies in these industries are especially sensitive to FX fluctuations.

For example, a Malaysian electronics manufacturer exporting components to the US could face this impact. Consider the following example:

• If 1 MYR = US$0.22, a shipment worth US$100,000 generates MYR 454,545. 

• If the MYR strengthens to 1 MYR = $0.25, the same US$100,000 shipment yields only MYR 400,000

• This results in a ~12% decrease in revenue in MYR.

When this happens, you’ll need to decide how to respond: keep your prices the same and accept lower revenue, raise foreign prices and risk losing customers, or adjust prices partially to share the impact with your customers.

3. Assets and loan covenants

Foreign currency assets and liabilities fluctuate in value as exchange rates move, affecting how your business appears financially even if operations remain steady.

Key impacts include:

• Foreign cash: Bank accounts in USD, SGD, or other currencies gain or lose MYR value

• Overseas property: Fixed assets abroad fluctuate in reported value

• Foreign receivables: Money owed in foreign currencies changes in MYR terms

• Foreign debt: Loans in foreign currencies become more or less expensive to repay

Translation risk becomes especially critical when debt covenants are tied to financial ratios. For example, if a loan requires maintaining debt-to-equity below 2:1, currency movements affecting asset values could trigger breaches even when the business is performing well.

4. Operating expenses

International operations generate ongoing FX exposure through routine expenses. Individually small, these costs add up over time.

Common expenses affected by FX risk include:

• Business travel costs

• Overseas office rent and utilities

• International conference fees

• Cross-border professional services

For example, a Malaysian company with a small sales office in Singapore or the US faces monthly exposure on rent, salaries, and operating costs. If the foreign currency strengthens, these expenses consume more MYR from the budget.

How do I measure FX exposure and choose a hedge ratio?

A hedge ratio is the percentage of your currency exposure that you choose to protect against adverse exchange rate movements. Setting the right ratio helps you balance the cost of hedging with the risk of losing money from currency fluctuations.

Follow these steps to identify FX exposure and decide how much of it to hedge:

Step 1: Map your currency flows

Start by identifying your foreign currency inflows and outflows. List the currencies you receive and pay in, the monthly amounts, payment dates, and whether transactions are committed or forecast.

You can reduce exposure naturally through netting, which refers to the practice of offsetting incoming and outgoing flows in the same currency. For example, if a Malaysian electronics exporter receives US$200,000 monthly from US customers and pays US$150,000 to US suppliers, the net exposure is only US$50,000.

Multi-currency accounts make netting easier. Instead of converting all foreign revenue to MYR immediately, you can hold balances in multiple currencies and match incoming payments against outgoing obligations in the same currency.

Step 2: Test your currency exposure

Stress testing shows potential losses from currency movements. You don’t need complex models – even a simple scenario analysis can reveal what happens if rates move against you.

For each major currency, run three scenarios:

• 5% adverse move: Modest shift

• 10% adverse move: Moderate shift

• 20% adverse move: Severe shift

For example, a Malaysian importer with EUR 100,000 quarterly exposure at a baseline of 1 MYR = €0.22 can estimate the MYR cost under these three scenarios:

This simple analysis shows the potential downside if the euro strengthens against the MYR. If even a 10% adverse move would significantly impact margins or cash flow, it indicates a need for hedging.

Step 3: Set your hedge ratio and timeframe

Your hedge ratio is the percentage of exposure you choose to protect. Common approaches include:

• Conservative (75–100%): Hedge most exposure, prioritising certainty

• Moderate (50–75%): Hedge core exposure, leaving some upside potential

• Selective (25–50%): Hedge only committed transactions

• Minimal (0–25%): Hedge only the largest exposures

You can also adjust your hedge ratio depending on the timeframe of your exposure. For example, many businesses hedge 100% of committed transactions, 50–75% of forecasted exposure for the next quarter, and 25–50% of the quarter after that.

How to reduce foreign exchange risk

Managing foreign exchange risk is about more than luck – it’s about having a plan for how and when your business handles currency conversions.

1. Use like-for-like settlement

The simplest way to reduce FX risk is to match your currency inflows and outflows, so you can avoid unnecessary currency conversions.

To do this, use a multi-currency account that offers like-for-like settlement. With like-for-like, you can use incoming payments in a currency to pay suppliers in the same currency without converting back to MYR.

Airwallex Global Accounts let you hold balances in 20+ currencies and open local currency accounts in 21 countries. For example, a Malaysian company selling to US customers in USD can keep the funds in a USD account and pay US suppliers directly in USD, eliminating FX risk on those transactions.

2. Lock in exchange rates

When you can’t avoid currency conversion, rate locking fixes the exchange rate in advance, removing uncertainty about future costs or revenue.

Forward contracts let you exchange currencies at a predetermined rate on a future date. For example, if you know you’ll need EUR 50,000 in three months, you can lock today’s rate, regardless of market movements.

With Airwallex’s scheduled conversions, you can lock in an exchange rate ahead of an upcoming payment, protecting against rate swings while you coordinate with suppliers.

For example, a Malaysian importer with a EUR 20,000 invoice due in 60 days can lock the rate at MYR 1 = EUR 0.22, guaranteeing a cost of MYR 90,909. If the euro strengthens by payment day, it doesn’t affect the company: it still pays the same MYR amount.

On the flip side, rate locking removes upside potential as well. If the euro weakens against the MYR, you’re still locked at the agreed rate.

3. Consider options for flexibility

When transaction timing is uncertain or you want protection against adverse currency moves without giving up potential gains, currency options can help. Options give you the right – but not the obligation – to exchange at a set rate, letting your business benefit if the exchange rate moves in your favour.

Options work well if you:

• Aren’t sure exactly when a payment will be made or received

• Want downside protection but still hope to gain from favourable currency movements

• Need budget certainty but want to keep some upside potential

A collar is a strategy that combines buying and selling options to reduce costs. You buy protection against adverse moves and sell upside to offset the premium, creating a range within which your rate can fluctuate.

Keep in mind: options are more complex and expensive than forwards, so they are best suited for larger exposures or genuinely uncertain timing.

4. Establish clear policies

Effective FX risk management requires clear policies to guide decision-making. A governance framework ensures consistent hedging, prevents costly mistakes, and gives management confidence that FX exposure is controlled.

Key policy elements include:

• Exposure limits: Set maximum unhedged exposure by currency and time period

• Hedge ratios: Define target percentages for committed and forecast transactions

• Approval processes: Specify who can execute hedges and in what amounts

• Monitoring frequency: Decide how often exposures are reviewed

• Reporting requirements: Outline what information is shared with management

Even small Malaysian businesses can benefit from simple, practical policies. For example:

• Hedge 100% of committed transactions over MYR 200,000

• Hedge 50% of forecast transactions for the next quarter

• Review exposures monthly and adjust hedge ratios as needed

Having these policies in place ensures that your business makes FX decisions systematically rather than reactively, reducing risk and improving planning for international payments.

Frequently asked questions (FAQs)

How do I choose hedge ratios for forecast transactions versus committed orders?

Hedge 100% of committed transactions with firm payment dates, then layer in 50–75% coverage for forecast transactions in the next quarter. As forecasts become firm orders, increase hedge coverage. Review monthly and adjust based on forecast accuracy and margin volatility tolerance.

What's the difference between forward contracts and scheduled conversions?

Forward contracts are binding agreements to exchange currencies at a set rate on a future date, typically used for transactions weeks or months away. Scheduled conversions let you lock a rate for shorter periods (up to 72 hours) with more flexibility to cancel if circumstances change, making them useful for near-term payments.

When should I use currency options instead of forward contracts?

Use options when transaction timing is uncertain, such as tender bids you might win, or when you want protection against adverse moves without giving up potential gains. The premium cost is worthwhile when flexibility matters more than the certainty forwards provide. For routine, predictable transactions, forwards are usually more cost-effective.

How does holding multi-currency accounts reduce my FX risk?

Holding multi-currency accounts reduces FX risk by letting you receive, hold, and pay in foreign currencies without converting to MYR immediately. This means you can use incoming payments in a currency to settle supplier invoices in the same currency, avoiding unnecessary conversions and protecting your margins from exchange rate swings. 

For example, a Malaysian company receiving USD from customers and paying USD suppliers can keep the funds in a USD account, eliminating FX exposure on those transactions.

How do I separate transaction risk from translation risk in my business?

Transaction risk affects cash flows from specific deals and should be hedged with forwards or options on actual payment flows. Translation risk affects how foreign subsidiaries appear on consolidated statements but doesn't impact cash. Most businesses don't hedge translation risk unless covenant ratios are at risk, focusing hedging efforts on transaction risk instead.

What information do I need to start managing FX risk in the next 30 days?

Gather six months of foreign currency receipts and payments by currency, typical payment terms with customers and suppliers, forecast international sales and purchases for the next two quarters, current foreign currency bank balances, and any existing hedges. This baseline lets you calculate net exposures and set initial hedge ratios.

How can I reduce P&L volatility from foreign exchange gains and losses?

Use consistent hedge ratios to smooth volatility over time, implement natural hedging by matching currency inflows with outflows, and consider multi-currency accounts to reduce forced conversions that create accounting entries. For committed transactions, hedge accounting can match hedging gains and losses with the underlying transactions they protect.

This publication does not constitute legal, tax, or professional advice from Airwallex nor substitute seeking such advice, and makes no express or implied representations / warranties / guarantees regarding content accuracy, completeness, or currency. If you would like to request an update, feel free to contact us at [[email protected]]. Airwallex (Malaysia) Sdn Bhd is licensed in Malaysia as a MSB Class B (remittance business only) licensee and is regulated by Bank Negara Malaysia (licence number 00318).