Exchange rate volatility is one of the main challenges for those who operate or invest in emerging countries. This phenomenon, caused by abrupt variations in exchange rates, directly affects costs, revenues, cash flow and even the competitiveness of companies operating internationally. 

In this article, we’ll explore: 

• The main causes of high volatility in emerging countries;
• How this risk impacts companies and investors;
• What tools exist to manage exchange rate risks;
• And what recent lessons the market has brought us. 

Happy reading! 

What makes volatility more intense in emerging countries? 

In emerging markets, there is a combination of structural and cyclical factors that increase exchange rate risk. Issues such as dependence on commodities, fiscal and trade deficits, as well as political instability, are constant in these countries. 

Another aggravating factor is the lower liquidity of local markets. In other words, any inflow or outflow of capital, even if relatively small, can generate sudden movements in exchange rates.  

The South African rand (ZAR), for example, often suffers sharp devaluations at times of global tension. This happens even if local fundamentals remain stable. 

In addition, emerging countries tend to have lower international reserves and higher external debts. This combination reduces the ability of central banks to intervene in times of stress.  

An emblematic case is that of Egypt. In 2023 and 2024, the country faced a sharp devaluation after losing more than 40% of the value of its currency due to a shortage of dollars and high foreign debt. 

Among the external factors, US monetary policy has a huge influence on emerging countries. When the Federal Reserve (Fed) raises interest rates, American assets become more attractive, stimulating capital outflows from these markets. 

This movement puts direct pressure on local currencies, which tend to depreciate rapidly. This is exactly what happened in 2022, when the Brazilian real lost strength, even with commodity prices at high levels. 

Another relevant factor is geopolitical tensions, such as the trade dispute between the United States and China. In addition, events such as elections in major powers often cause uncertainty in the markets. 

Read also: 

• Understand the influence of the Federal Reserve (FED) on the Brazilian economy 

What are the impacts of exchange rate volatility for companies and investors? 

Volatility is not just a theoretical concept: it actually has a direct impact on companies’ operations. Without proper risk management, exchange rate variations can erode margins, generate additional costs and affect cash flow. 

For companies that depend on foreign currencies, this translates into significant challenges. The lack of exchange rate predictability hinders not only long-term planning, but also day-to-day operational decisions. 

In addition, the perception of country risk has a direct impact on the confidence of foreign investors. When there is no efficient risk control, the cost of raising funds rises, as does the difficulty of accessing international credit lines. 

In practice, there are two main types of risk for companies operating in emerging countries: 

• Direct risk: when revenues, costs or debts are exposed in foreign currencies.
• Indirect risk: this occurs when exchange rate variations influence macroeconomic variables such as inflation, domestic demand and access to credit. 

Read also: 

• Risk management in commodities: how does it work? 

Tools for managing exchange rate risks: what can companies do? 

Managing exchange rate risks is essential for any company exposed to international markets, and this applies to large corporations as well as small and medium-sized ones. 

The first step is to understand how the company’s operating cycle connects with its foreign exchange exposure. Based on this diagnosis, it becomes possible to adopt a formal risk management policy that aligns with the objectives and needs of the operation. 

Exchange rate protection in emerging countries 

The main tools include: 

• Forward contracts: allow an exchange rate to be fixed for a future date, bringing predictability to specific transactions;
• Currency swaps: used to exchange cash flows between different currencies, they are often used in long-term financing. For example, a cooperative that has borrowed in dollars can use a swap to “convert” this liability into reais, reducing its exchange rate exposure;
• NDFs (Non Deliverable Forwards): contracts widely used for currencies in illiquid or non-convertible markets, such as the Argentine peso or the Nigerian naira. In this case, the company can contract an NDF to hedge against the volatility of the Colombian peso without the need to carry out a physical transaction in the currency;
• Currency options: which offer the right, but not the obligation, to buy or sell currency at a pre-established rate;
• Automated solutions such as AutoFX: which help reduce operational errors and speed up the processing of operations; 

Complementary risk mitigation strategies 

In addition to financial instruments, geographical and currency diversification has emerged as an important practice. This strategy allows companies to be less exposed to the fluctuations of a single economy or currency. 

It’s also worth noting that there are already more accessible alternatives for smaller companies. Brokers and specialized fintechs offer contracts with reduced minimum values and, in some cases, make hedging possible through consortia between companies in the same sector.  

Another approach is to look for a so-called natural hedge, which consists of balancing income and expenses in the same currency. For example, an exporter can dollarize part of its operating costs, reducing its dependence on the local currency. 

Read also:  

• Hedging: an essential strategy to protect farmers from volatility 

What have we learned from recent crises? 

The currency crises that have affected countries like Nigeria, Egypt and Argentina in recent years have taught us important lessons. One of them is that risk management should not only be triggered when the exchange rate has already skyrocketed. 

Companies that maintain an active currency hedging policy, even in times of lower volatility, manage to preserve their financial health. What’s more, they increase their competitiveness in foreign markets. 

On the other hand, common mistakes are still observed in the market, such as: 

• Treating currency protection as a cost and not as a tool for financial resilience;
• Hiring complex instruments without a full understanding of the risks involved;
• Hedge only part of the exposure, leaving the operation vulnerable. 

Read also: 

• Exchange rate policy: what is it and what impact does it have on the commodities market? 

Ready to manage your risks in emerging countries? 

Understanding the risks of exchange rate volatility and, above all, knowing how to mitigate them is essential for companies’ financial health and competitiveness. A good hedging strategy allows managers to plan and make safer, more predictable decisions. 

And if quality information makes all the difference in this process, Hedgepoint HUB is your greatest ally. Our platform brings together in-depth analysis, up-to-date data, economic scenarios, commodity insights and much more. Turn knowledge into competitive advantage! 

Read also: 

• Hedgepoint Market Calls: strategic information for intelligent decisions 

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