Currency moves can quietly gut a contract that "felt right" at signing. Money illusion bias makes negotiators treat exchange rates as facts, not variables.
Every now and then I make the mistake of staring at currency pairings over my morning coffee, which is a guaranteed way to ruin a perfectly good cup. It does, however, remind me of my favorite finance joke: What's the best way to make a small fortune in Forex? Start with a large one.
I watched the unfunny version of this play out on a contract a few years back.
Western buyer, multi-year deal, prices denominated in the factory's local currency. Structured for "predictability." Buyer-side finance was happy because they felt they could forecast without much volatility. The supplier seemed fine with the terms and everyone walked away thinking they'd negotiated well. That's what matters, right? Everyone feeling like they got a good deal?
Hm.
Over eighteen months, the supplier's home currency weakened about 20% against the dollar. Their margin was evaporating in real time, but they were locked in by volume commitments that made walking away impossible. They didn't ask to renegotiate. They didn't raise it in quarterly reviews. They just started making adjustments: different material suppliers that technically, kind of, sort of met spec. Lead times that stretched for plausible-sounding reasons. Quality issues that were hard to articulate but obvious once you saw the pattern.
By the time the buyer understood what was happening, switching costs had made them just as captive as volume had made the supplier. When the contract came up for renewal, there wasn't much left to salvage, let alone a partnership. Just two parties who both felt cheated by a deal that had "felt" right.
Call it vibe negotiation, if you will.
This is money illusion bias in practice. We negotiate as if currency values are stable facts rather than variables that can swing hard over a contract term. The number on the page looks solid. It's printed, it's agreed, it's in the system. So everybody treats it as fixed and moves on.
The negotiators who handle this well don't build elaborate hedging mechanisms that only a lawyer could love and nobody uses. They front it directly: exchange rates move, sometimes dramatically, and we need a shared understanding of how we'll address that when it happens. Not if it happens. When.
What that looks like in practice varies. The specifics matter less than the conversation. The problem in the deal I described is that nobody wanted to have the uncomfortable conversation about what happens when the currency moves 20%. That conversation feels pessimistic at signing. It feels prophetic eighteen months later.
If you've got multi-year contracts with pricing denominated in a currency that isn't yours, it might be worth checking whether anyone ever had that conversation.
We work with commercial teams on exactly these kinds of problems.