Write short notes on Measuring foreign exchange risk.
Answers
Foreign exchange risk describes the risk that an investment’s value may change due to changes in the value of two different currencies. It is also known as currency risk, FX risk and exchange-rate risk.
Foreign exchange risk sometimes also refers to risk an investor faces when they need to close out a long or short position in a foreign currency and do so at a loss due to fluctuations in exchange rates.
Some types of exposure associated with foreign exchange risk include economic exposure, translation exposure and contingent exposure.
Economic exposure, or forecast risk, refers to when a company’s market value is impacted by currency volatility. Translation exposure refers to when foreign exchange rates change, affecting the figures that a multinational company reports to its shareholders. Contingent exposure refers to the risk that firms face when they bid on projects in foreign currencies.