Question

What is foreign exchange risk management? Give the methods of foreign exchange risk management?

Answer 1

Answer:

Foreign exchange risk (also known as FX risk, exchange rate risk or currency risk) is a financial risk that exists when a financial transaction is denominated in a currency other than that of the base currency of the company. The exchange risk arises when there is a risk of appreciation of the base currency in relation to the denominated currency or depreciation of the denominated currency in relation to the base currency. The risk is that there may be an adverse movement in the exchange rate of the denomination currency in relation to the base currency before the date when the transaction is completed.[1][2]

Foreign exchange risk also exists when the foreign subsidiary of a firm maintains financial statements in a currency other than the reporting currency of the consolidated entity.

Investors and businesses exporting or importing goods and services or making foreign investments have an exchange rate risk which can have severe financial consequences, but steps can be taken to manage (i.e. reduce) the risk

Explanation: