What is foreign exchange risk?
Foreign exchange risk is the risk to the value of one’s assets when it is valued in another currency. The exchange rate of a currency to another may be volatile. It is this change in value of the currency that gives rise to foreign exchange risk. A depreciation in the currency in which your assets are denominated will result in a lower value of your assets when measured in another currency compared to the period before depreciation.
What kind of assets or transactions are subject to foreign exchange risk?
Ownership of foreign assets, international trade, overseas remittances, foreign currency loans, overseas payments and receipts, receipt of foreign stock dividends, pension funds, payment to a overseas supplier and holiday expenses overseas are transactions that are subject to foreign exchange risk.
Who is exposed to foreign exchange risks?
Importers and exporters, foreign students, companies with overseas branches and companies whose income is denominated in a foreign currency are examples of people or entities that are exposed to foreign exchange risk.
How will the movement of exchange rates affect you?
If you are an exporter, an appreciation of the local currency will result in your goods being more expensive in the foreign currency. Usually, an appreciation of the local currency is not good for exporters. If you are an importer, a deprecation of the local currency is not good for you. This is because you will have to pay more in local currency to buy the same amount of foreign currency to pay your supplier overseas. If you do not reduce or eliminate your foreign exchange risks, your business may be negatively affected.
How do I protect myself against foreign exchange risk?
