The paper "Types of Foreign Exchange Risk" is a wonderful example of a report on macro and microeconomics. Foreign exchange risk refers to the danger that the financial position or performance of a business organization will be influenced by variations in different currencies’ exchange rates. This type of risk is more pronounced in firms, which carry out their transactions in various currencies, For instance, a firm exports its goods to a different nation, and the buyer is allowed to pay for the goods using their own currency. Risks relating to foreign exchange ought to be controlled where exchange rates’ fluctuations affect the profitability of a company (Dufey & Giddy, 2008, p. 69).
This paper will talk about the objectives of carrying out risk analysis, as well as the key techniques that are used in foreign exchange risk analysis. Types of Foreign Exchange Risk Transaction risk According to Dominguez & Tesar (2001, p. 396), this is experienced when an organization borrows, lends, or trades in an alien currency, or disposes of fixed assets belonging to its subsidiaries located in another country. All the undertakings involve time decay from the time the transaction takes place to the delivery of receipt of payment.
In that time gap, exchange rates will definitely change and thus the organization is at risk which may be favorable or adverse. Transaction exposure is more common in the import and export business. The risk usually goes to the exporter because the selling price of the goods is quoted in the currency of the buyer. Economic risk This measures the variation in a firm’ s present value as a result of any change in its future cash flows that is caused by an unforeseen exchange rates’ change.
A firm’ s future revenue may be categorized into revenue from contractual transactions and that from expected future transactions. To some extent, transaction exposure forms a part of economic exposure. However, the difference between transaction exposure and economic exposure is that the former arises from a company’ s contractual transactions, and the values to be received or paid are known, while in the latter, the values are based on approximation and are uncertain (Dominguez & Tesar, 2001, 398).
Crabb, P. (2001). Multinational Corporations and Hedging Exchange Rate Exposure. International Review of Economics and Finance, 11(3), 25-32.
Dominguez, K., & Tesar, L. (2001). A re-examination of Exchange Rate Exposure. American Economic Review, 91(2), 396-399.
Dufey, G., & Giddy, I. H. (2008). International Financial Planning: The Use of Market-Based Forecasts. California Management Review, 21(1), 69-81.
Hekman, C. R. (2001). Foreign Exchange Risk: Relevance and Management. Managerial and Decision Economics, 2(4), 256-262.
Kavaliova, M. (2007). Foreign Exchange Risk Management: Which Hedging Techniques Can Be Used by a Mid-size Company. Tennessee: Lightning Source Incorporated.
Wang, P. (2009). The economics of foreign exchange and global finance. Berlin: Springer.