For example: company A, based in Europe, agrees to sell a commodity or service to company B, based in the US today with the deal agreed at X dollars. This is the risk raised as fluctuations in the exchange rate between the signing of a transaction and it actually going ahead. Secondly, transaction risk must be born in mind.Should a firm not closely monitor the economic environments of the regions in which they operate, they may leave themselves exposed to unwanted currency risks. Economic risk – the possibility that macroeconomic conditions such as government regulation, political stability and interest rates will impact a firm’s net cash inflows from business activities carried out abroad – can have adverse impacts on that company’s competitive advantages.
There are three main risks to take into consideration: FX management brings with it a slew of different risks. That said, when entering the market, a thorough assessment of different currency risks and currency hedging strategies should be undertaken in order to consider positions, strategies, and timing of deals and transactions. However, FX risk can present a variety of challenges, but the opportunities possible for those in the know who utilise the spot and futures markets also allows firms not only the ability to dilute the risks of moving funds between currencies but to also profit from each transaction. As the value of two currencies changes in relation to each other, the value of a cash flow in terms of the other currency will also change. In and of itself, FX exposures are a straightforward concept: it arises principally from the requirement to convert a cash flow or amount in one currency into another as the result of a transaction or internal transfer. With nationalised agendas seizing global markets, one thing that treasurers and risk managers must assess on a daily basis is foreign exchange (FX) risk, as they move funds between jurisdictions.įX risk management is far from a new phenomenon. However, with national regulators driving their own agenda, informed by regional political climate, regimes have diverged somewhat, creating both frictions and opportunities for those market participants active in different geographies. Since the financial crisis, national regulators have been tasked by industry bodies – such as the International Swaps and Derivatives Association (ISDA) – as well as international market participants to create frameworks that reflect the global nature of financial markets.
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