What are the main types of Foreign Exchange Risk?
Transaction Risk
This is the risk that is faced by companies when making financial transactions between countries and jurisdictions. The risk can be the change in the exchange rate before a transaction settlement – the transaction risk is caused by the time delay between the transaction and settlement.
Translation Risk
Also known as Translation Exposure, this is the risk that companies’ equities, assets, liabilities, and sometimes income can change as a result of foreign exchange rate changes.
Economic Risk
This can also be called forecast risk, and is the risk that any company’s market value can be impacted because of the unavoidable exposure to exchange rate fluctuations. How is this created? Usually by situations such as geopolitical instability, or government changes.
Jurisdiction Risk
Not as common as the other risks, jurisdiction can arise when laws and regulations change in the countries where the company is doing business. This is normally an issue in unstable countries.
John Freeme from XE is holding a seminar at our financeSHOWCASE event in Birmingham next week. His talk, ‘Navigating the most liquid and volatile market in the world’ covers FX risk. With global trade at record highs, businesses are more exposed to currency fluctuations than at any time in history.
Volatility will be high in foreign exchange next year.
The time it takes to lift their phone and make a call to a foreign exchange dealing desk, or to log in to their online banking platform with a username and password to create a password – FX algorithm or a ‘trading bot’ can trade up to 10,000 times!
In a market that moves this quickly, with the ability and the agility to react to something negative or positive mentioned on Reuters in seconds, companies exposed to foreign exchange risk have a plan or policy around how they deal with foreign currency.
Listen to this informative seminar and others from some expert speakers at our financeSHOWCASE event – register for your FREE tickets here
