Professional Documents
Culture Documents
This risk usually affects businesses that export and/or import, but
it can also affect investors making international investments. For
example, if money must be converted to another currency to
make a certain investment, then any changes in the currency
exchange rate will cause that investment's value to either
decrease or increase when the investment is sold and converted
back into the original currency.
Also called the clean float. A genuine free float would involve
leaving exchange rates entirely to the vagaries of supply and
demand on the foreign exchange markets and neither intervening
in the market using official reserves of foreign exchange not
taking exchange rates into account when making interest rate
decisions.
Managed Floating Exchange Rates (also called dirty float)
Transaction Risk
Economic Risk
The variation in the value of the business (i.e., the present value
of future cash flows) due to unexpected changes in exchange
rates. It is the long term version of transaction risk.
Translation Risk
Practical Approaches
See separate sheet
Trading in Currencies
Hedging a Payment
Hedging a Receipt