User:Rouweilin

Foreign Exchange Risk
Foreign Exchange Risk, also as known as FX Risk, Exchange Rate Risk, and Currency Risk, can be occur when a company is having a transaction with a foreign company under the situation when one currency is stronger than the other. It doesn’t matter if a business is big or small. As long as a company is dealing with a foreign company, there is always an exposure of foreign exchange risk more or less. There are a couple of factors that are causing the risk.

1.    Commodity prices,

2.    Interest rates,

3.    Inflation, and

4.    Exchange rates.

Three main types of Exchange Rate Risk
According to Shapiro, 1996, there are three main types of exchange rate risk:

1.    Transaction risk,

2.    Translation risk, and

3.    Economic risk.

Transaction risk means a cash flow risk, such as the one mentioned earlier, losses that are likely to occur when dealing in different currency.

Translation risk is not a risk caused by different languages but it’s about balance sheet, assets, equities, and liabilities. Translation exposure is also called Accounting exposure.

Economic risk is a risk that a firm has to face. It can be a different political policy, different regulation between countries, or a current economic situation in the world (i.e., Brexit).

--- Some people might think that Foreign Exchange Risk will only cause trouble or loss; however, some people can actually earn some profit from it. ---

How to prevent
It is almost impossible to eliminate the risk; however,

A company can minimize their risks when they have a business with other company in different country by using two options.

1.    Pre-Hedging

2.    Dynamic Hedging

A Dynamic Hedging will prevent an exchange rate risk and allows company to manage automatically.

You can also calculate the potential lost or how much risk your firm is expose to by looking at your accounts. Simply look at your record and take an inventory from it. Basically, pay attention to whatever you’ve spent money for any oversea action. It can be any expenses that you’ve made, such as a paycheck you gave to a person who’s working for you abroad, or any investments in global bonds, funds, and stocks.