Understanding Currency Risk
Currency risk, also known as exchange rate risk, refers to the potential for financial losses due to fluctuations in currency exchange rates. This risk affects investors, businesses, and anyone dealing with foreign currencies.
Types of Currency Risk
- Transaction Risk: Exposure from outstanding financial obligations in foreign currency.
- Translation Risk: Changes in the reported financials of multinational companies due to currency rate changes.
- Economic Risk: Long-term effect of exchange rate changes on a company's market value.
Managing Currency Risk
Common strategies include hedging with forwards or options, diversifying currency exposure, and careful timing of transactions to reduce potential losses.