A profitability analysis of foreign Exchange risks and international contracts in Colombia

Abstract

Exchange rate volatility in Colombia has become one of the most decisive factors affecting the profitability and financial stability of international contracts entered into by importing and exporting companies. Under an inflation-targeting framework and a floating exchange-rate regime, the Colombian peso (COP) reacts immediately to external shocks derived from global interest rates, geopolitical tensions, international trade dynamics, and capital flows. These fluctuations impact import costs, export revenues, and the present value of foreign-currency financial obligations. Exchange-rate risk appears in three main forms: transactional exposure, translation exposure, and economic exposure, all highly relevant for financial planning and contractual profitability. Furthermore, contractual structure —currency of payment, negotiation terms, INCOTERMS, delivery periods, indexation clauses, and the use of financial instruments— can significantly increase or mitigate exchange-rate exposure. Although the Colombian market offers hedging mechanisms such as NDF forwards, currency swaps, options, and natural hedges, adoption remains limited, especially among small and medium-sized firms, due to access barriers, transaction costs, lack of technical knowledge, and absence of internal policies. Effects vary by sector: while depreciation of the peso may increase revenues for agro-exporters, it simultaneously raises the cost of dollar-denominated inputs; for importing companies, it increases inventory costs, raw-material expenses, and external debt burdens. Border regions such as Norte de Santander experience intensified volatility due to cross-border exchange arbitrage and binational commercial dynamics. This study, based on a qualitative methodology through documentary analysis, interviews, and non-participant observation, demonstrates that the lack of internal hedging policies, limited contractual standardization, and low financial literacy significantly increase vulnerability to risk. Findings indicate that incorporating exchange-rate adjustment clauses, continuously monitoring the TRM, strategically using derivatives, and implementing internal financial-risk models contributes to improved profitability and operational stability for companies engaged in international trade.