ForeignExchangeExposure refers to a potential increase or decrease in the cost, profit, cash flow, or market value of an enterprise due to fluctuations.
According to the object of action and the form of expression of foreign exchange risk, the present academic circle generally divides foreign exchange risk into three categories: transaction risk, translation risk and economic risk.
1. Transaction risk Transaction risk, also known as transaction settlement risk, refers to the possibility that economic entities may suffer losses due to changes in foreign exchange in transactions denominated, collected and paid in foreign currencies.
It is a traffic risk.
2. Translation risk Translation risk, also known as accounting risk, refers to the risk caused by changes in the value of overseas assets and liabilities caused by exchange rate changes in the process of accounting treatment of balance sheets by economic subjects. It is a kind of stock risk.
There are three types of translation risk: stock translation risk, fixed assets translation risk and long-term debt translation risk.
There is also a certain relationship between the size of the risk and the conversion method. In history, there have been four conversion methods in Western countries.
3. Economic risk Economic risk, also known as business risk, refers to a potential risk caused by unexpected exchange rate fluctuations in a company or enterprise’s earnings or cash flow changes in a certain period in the future.
Here, earnings refers to profit after tax and cash flow refers to earnings plus depreciation.
Economic risks can include real asset risks, financial asset risks and operating income risks, which mainly depend on the impact of exchange rate changes on production costs, sales prices and production and sales quantities.
For example, a country may stimulate exports by making the foreign-currency price of exported goods lower, or it may reduce the supply of the imported raw materials it uses by making the local currency cost higher.
In addition, the impact of exchange rate changes on prices and volumes may not be immediately apparent, and these factors directly affect the size of corporate earnings changes.
