foreign exchange risk

(redirected from Exchange Risks)

Foreign exchange risk

The risk that a long or short position in a foreign currency might have to be closed out at a loss due to an adverse movement in exchange rates. In general, the risk of an adverse movement in exchange rates.

Foreign Exchange Risk

The risk that the return on an investment may be reduced or eliminated because of a change in the exchange rate of two currencies. For example, if an American has a CD in the United Kingdom worth 1 million British pounds and the exchange rate is 2 USD: 1 GBP, then the American effectively has $2 million in the CD. However, if the exchange rate changes significantly to, say, 1 USD: 1 GBP, then the American only has $1 million in the CD, even though he/she still has 1 million pounds. Foreign exchange risk is also called exchange rate risk.

foreign exchange risk

The risk that the exchange rate on a foreign currency will move against the position held by an investor such that the value of the investment is reduced. For example, if an investor residing in the United States purchases a bond denominated in Japanese yen, a deterioration in the rate at which the yen exchanges for dollars will reduce the investor's rate of return, since he or she must exchange the yen for dollars. Also called exchange rate risk.
References in periodicals archive ?
Foreign exchange risks clearly affect every aspect of a business, and their management requires implementation of company-wide processes.
Although transaction and economic exchange risks both concern cash flow risk, financial instruments are not suitable for managing economic exchange risk.
This is, however, not to say that companies do not suffer from economic exchange risk.
Broadly speaking, economic exchange risk is a function of the geographical structure of a company as well as the industry in which it operates.
This is because there is a widespread belief that economic exchange risk is an extension of transaction exchange risk, since both are concerned with future cash flows -- the difference is that its cash flows have not yet materialised.
An immediate response to this risk is to forecast future cash flows and hedge these in the financial markets in the same way as transaction exchange risk.
To manage corporate transaction exchange risk, managers need to understand the costs, characteristics and risk profiles of various financial instruments.
Industry Veteran, Wolfgang Koester, Shares Guidelines for Establishing Ownership, Processes and Accountability to Mitigate Foreign Exchange Risks
This cuts shipping costs and puts us in the same currency zone as the customers, so we neutralize exchange risk.