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Chapter 6
Foreign exchange risks
2.1 Types of risk exposure
 Transaction risk
 Economic risk
 Translation risk
2.2 Managing transaction risk
 Forward contract
 Futures contract
 Currency options
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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.
a binding agreement to buy or sell a specific amount of
foreign currency at a given future date using an agreed
forward rate. Fixes future FX rate
Exchange currency at (future) spot. Separately set up
futures position. Combination hedges risk giving an
effectively fixed rate.
The right, but not the obligation, to buy or sell a
currency at an exercise price on a future date. Can
allow to lapse if the FX rate moves in your favour