{"id":2240,"date":"2022-07-29T18:20:52","date_gmt":"2022-07-29T18:20:52","guid":{"rendered":"http:\/\/www.fortunetechnologyllc.com\/?p=2240"},"modified":"2022-08-13T09:27:08","modified_gmt":"2022-08-13T09:27:08","slug":"types-of-exchange-rate-risk","status":"publish","type":"post","link":"https:\/\/www.fortunetechnologyllc.com\/types-of-exchange-rate-risk\/","title":{"rendered":"Types of Exchange Rate Risk"},"content":{"rendered":"
Currency rate fluctuations influence the value of organization\u2019s revenues, expenses, cash flows, assets, and liabilities.
\nCalculation of Currency rate fluctuations for Business organisations with foreign entities, are based on several transactions.
\nIt includes exports, imports, borrowing, lending, portfolio investment and direct investment among other things. So an organisation need to know different types of Exchange Rate Risks.<\/p>\n
Exchange Rate Risks or Exchange Rate Exposure is normally the risk result from fluctuations in the exchange rate<\/p>\n
Firms must be extremely vigilant about Exchange Rate Risks as the exchange rate for foreign currencies fluctuates often these days.<\/p>\n
The impact of variations on Exchange rate not only affect the organization that is directly involved in international commerce but also the domestic organization. Fluctuations on Exchange rate may affect operating cash flows and the home currency value of the firm\u2019s assets and liabilities. Exchange rate is categorised into three for easy understanding.<\/p>\n
(a) Transaction Exposure<\/p>\n
(b) Translation Exposure<\/p>\n
(c) Economic Exposure<\/p>\n
Transaction exposure occurs when an organization has assets and liabilities that are contractually fixed in foreign currency and are expected to be liquidated in the near future.\u00a0 As a result, currency rate variations would affect loans, interest, dividends, and royalties paid to or received from foreign organizations. Transaction exposure is also created by any other receivables or payables, principal and interest repayments to foreign companies due within the current financial year.<\/p>\n
The following are the some examples of transaction exposure<\/p>\n
A foreign currency loan or interest is due to be paid or received soon.<\/p>\n
A foreign currency receivable or due originating from the sale or purchase of goods and services is about to be liquidated shortly;<\/p>\n
A dividend or royalty payment, for example, is to be made or received in foreign currency.<\/p>\n
Translation Exposure arises from the fluctuating value of assets and liabilities as they show on the balance sheet and are not expected to be liquidated in the near future. This is often referred to as Consolidation Exposure or Balance Sheet Exposure. Translation exposure is purely nominal in nature because translation losses and benefits will vary depending on accounting principles. This viewpoint, however, is not universally shared. As a result, an attempt is made to quantify and control it. The primary distinction between transaction exposure and translation exposure is that the transaction exposure affects cash flows while the latter does not.<\/p>\n