Origin of the Exchange Risk
When companies close deals into different currencies, they face exchange risk. The risk is due to the fluctuations of currencies between each other.
- If a company buys and sells into different currencies, then its turnover and expenses can vary according to the fluctuations of the exchange rate for these currencies.
- If a Company has borrowed funds in a different currency, the repayments of the debt could change or, if the Company has invested overseas, the returns on investment may alter with exchange rate variations — this is usually known as foreign currency exposure.
From the very moment a company acquires assets or performs financial transactions beyond the boundaries of its own country, it faces exchange risk if its commercial position is not hedged: the risk of losses because of a unfavorable variation of the exchange rates, can be hedged with currency futures.
The company's position depends on the difference between:
- its commercial forecasts (export and import),
- its currency exchange transactions (buy and sell).
