Page 232 - FM Integrated WorkBook STUDENT 2018-19

Chapter 13

Types of foreign currency risk

2.1 Transaction risk

Transaction risk is the risk of an exchange rate changing between the
transaction date and the subsequent settlement date, i.e. it is the gain
or loss arising on currency conversion.

It arises on any future transaction involving conversion of cash between
two currencies. The most common area where transaction risk is
experienced relates to imports and exports.

A firm may decide to hedge – take action to minimise – the risk, if it is:

 a material amount

 over a material time period

 thought likely exchange rates will change significantly

Hedging methods are looked at later in this chapter.

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