Page 145 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Currency risk management
Currency risk management
4.1 Types of risk exposure
 Transaction risk
 Economic risk
 Translation risk
4.2 Internal Methods
 Home currency
 Leading/lagging
 Matching/netting
 Countertrade
The risk of exchange rates changing before the
settlement date of a transaction.
The risk that long-term adverse movements in
exchange rates make the company less competitive
internationally.
The risk of exchange rate movements between one
year and the next causing fluctuations in values of
foreign currency assets and liabilities in consolidated
accounts.
Note: unrealised translation losses can affect
borrowing capacity.
Passes risk to other party
Unlikely to be commercially acceptable
Speed up / delay payment depending on expectations of
exchange rate movement
Problem predicting movements
Match / net off transactions in the same currency
Easier if use foreign bank accounts (risk exposure on net
balance)
Avoid using currency and exchange products of equivalent
value
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