Also referred to as currency risk, foreign exchange risk refers to the probability of a business’ value depreciating due to the change in values of currency. Businesses that deal with export and imports are the ones mainly affected by value changes of currencies. Foreign exchange risk can also be referred to the risk a business has to deal with, closing a long or short position in another currency at a loss.
Foreign exchange is, arguably, the largest market in the world. This market has a daily turnover of almost a trillion pounds. Therefore, any business that depends on two or more currency types, are likely to lose a lot of money when one of the currency depreciates. The currency exchange rates are affected by a number of things. Demand and supply of different currency types are the most influential factors of the rate of exchange. Politics can also greatly influence the foreign exchange rates.
Translation foreign exchange risk affects numerous businesses. Businesses that have assets abroad, and the base currency of the foreign country shifts unfavourably, will lose a lot of money. Yes, even if a firm is not ready to crystalise the asset in the short-run, such an unfavourable currency shift affects their overall net-worth. A business dealing with this kind of foreign exchange risk can do little about it. However, if the firm’s financial experts predict a large unfavourable currency rate shift, liquifying the asset as soon as possible is advisable.
Settlement risk is another foreign exchange risk. Firms that directly engage in selling and buying of currencies are most likely to be affected by this type of risk. A trading firm, or individual, must, therefore, be ready to deal with losses if their broker failed to honour their part of the deal. The bank you made a currency transaction with might also go bankrupt. Businesses can avoid dealing with this kind of foreign exchange risk by only dealing with credible banks, and brokers. Moreover, seeking expert advice is very important.
The IXE Financial Group is one of the best firms you can count on for advice. The Facebook presence of IXE Financial Group makes it easier to contact them!