Currency risk, also referred to as foreign exchange risk, is the risk from adverse movements in exchange rates. When a company has assets or liabilities denominated in a foreign currency, or contracts to receive or pay in a foreign currency, it has an exposure to that currency.
An adverse movement in the exchange rate can affect a company by
Reducing its cash income
Increasing its cash expenditures
Reducing its reported profits
Reducing its reported value of its currency assets
Increasing the value of its foreign currency liabilities
Damaging its competitive position in its domestic and foreign
markets to the advantage of foreign rivals.
Cash flows are at risk from adverse exchange rate movements because
Companies that receive income in foreign currency often will wish to exchange it into domestic currency.
Companies with debts in a foreign currency will have to convert domestic currency into the foreign currency, i.e. buy currency, to pay what they owe.
Currency risk to cash flows arises because of movements in the prices, or exchange rates, at which foreign currency is converted.
Profits also are at risk if they are earned by foreign subsidiaries. A U.K. company, for e.g. might earn annual profits of $ 600,000 from a US subsidiary.
If the sterling/dollar exchange rate moves from £ 1= $1.5 to £1 =$2,the value of annual profits will slide from £ 400,000 to £ 300,000. In much the same way, the value of the assets of foreign subsidiaries, expressed in the parent company’s domestic currency, is at risk from adverse exchange rate movements.
Currency Risk arises for organizations involved, directly or indirectly, in international trade and finance because
Exchange rates are volatile, in both the short and long term
Future movements in exchange rates cannot be predicted accurately
Companies have exposures to foreign currencies and will suffer losses, or loss of business as a result of adverse exchange rate movements.
An adverse movement in the exchange rate can affect a company by
Reducing its cash income
Increasing its cash expenditures
Reducing its reported profits
Reducing its reported value of its currency assets
Increasing the value of its foreign currency liabilities
Damaging its competitive position in its domestic and foreign
markets to the advantage of foreign rivals.
Cash flows are at risk from adverse exchange rate movements because
Companies that receive income in foreign currency often will wish to exchange it into domestic currency.
Companies with debts in a foreign currency will have to convert domestic currency into the foreign currency, i.e. buy currency, to pay what they owe.
Currency risk to cash flows arises because of movements in the prices, or exchange rates, at which foreign currency is converted.
Profits also are at risk if they are earned by foreign subsidiaries. A U.K. company, for e.g. might earn annual profits of $ 600,000 from a US subsidiary.
If the sterling/dollar exchange rate moves from £ 1= $1.5 to £1 =$2,the value of annual profits will slide from £ 400,000 to £ 300,000. In much the same way, the value of the assets of foreign subsidiaries, expressed in the parent company’s domestic currency, is at risk from adverse exchange rate movements.
Currency Risk arises for organizations involved, directly or indirectly, in international trade and finance because
Exchange rates are volatile, in both the short and long term
Future movements in exchange rates cannot be predicted accurately
Companies have exposures to foreign currencies and will suffer losses, or loss of business as a result of adverse exchange rate movements.