What is the risk of foreign exchange speculation?
Since the implementation of the floating exchange rate system in 1973, the currency exchange rate has fluctuated frequently, not only in a large range, but also among various major currencies, there is often a situation of strength and status conversion.
Before the reform and opening up, due to the strict foreign exchange management and the fact that most foreign-related enterprises did not really become the subjects responsible for their own profits and losses, foreign exchange risks were mainly borne by the state.
As our country enters WTO day by day approaching, banks, enterprises can not rely on government’s protection already.
Investment speculators in the market often talk about how to make money in the foreign exchange market.
However, if we look at it from another Angle, we view the fluctuations of the global currency market as risks. No matter whether individuals, banks or enterprises participate in the trade, as long as there is foreign exchange, there are risks.
Generally speaking, people refer to the “loss due to exchange rate fluctuations and the possibility of losing expected benefits” as foreign exchange risk.
It is also common to refer to the amount of foreign currency exposed to foreign exchange risk as “at risk”.
Therefore, how to prevent foreign exchange risk has become a pressing task for banks, companies and individuals.
One of the manifestations of foreign exchange risk is: foreign exchange trading risk.
Foreign exchange risks arise from the exchange of domestic and foreign currencies.
Foreign exchange banks dealing in foreign exchange are mainly exposed to foreign exchange risks.
The same risks also occur when enterprises other than banks make loans or borrowings in foreign currencies and conduct foreign exchange transactions accompanied by foreign currency loans or borrowings.
Buying and selling foreign exchange by individuals also carries risks.
The second manifestation of foreign exchange risk is the risk of converting a national currency into a foreign currency for the purpose of future foreign exchange transactions, since the exchange rate applicable for future transactions is not determined.
This is also known as the “transaction settlement risk” because it is the risk of trade and non-trade transactions denominated in foreign currencies.
The third manifestation of foreign exchange risk is the question of how to evaluate a company’s foreign currency in terms of its accounting treatment and the final settlement of foreign currency claims and debts.
For example, when evaluating creditor’s rights and debts in the final accounts, there will be differences in the profit and loss on the book due to the different exchange rates applied, so it is also called “evaluation risk” or “foreign exchange conversion risk”.
The fourth manifestation of foreign exchange risk is: economic risk – refers to the risk that the future expected earnings of an enterprise or an individual may be damaged due to changes in the exchange rate.
The fifth manifestation of foreign exchange risk is: country risk – that is, political risk.
It refers to the possibility of losses caused by the termination of foreign exchange transactions of a company or individual due to the state’s enforcement.
