The risk is that borrowing external debt will eventually have to be repaid in local currency or with the proceeds from exports.
For Chinese borrowers, the former is converted into foreign exchange quotas, so the exchange rate risk they bear is twofold: one is risk.
For example, on May 15, 1985, the exchange rate of the yuan pair was $100 =28.
At this time, if the borrower undertakes the debt of 100 million US dollars, he can use 283 million RMB to repay this debt. But on May 15, 1987, the exchange rate of RMB to US dollar is 100 US dollars =372 Yuan, he needs to use 372 million RMB to repay the debt of 100 million US dollars.
Second, the risk of exchange rate changes between different foreign currencies.
Since the collapse of the Bretton Woods system in 1973, the capitalist countries generally adopted floating exchange rates, which brought exchange rate risks.
When the currency that the borrower can use as repayment in the future is not the borrowed currency, for example, when the borrower borrows, the dollar is used to repay, the exchange rate of the yen to the dollar at the time of borrowing and repayment changes, such as the appreciation of the yen than when borrowing, the borrower will bear a certain exchange rate risk.
Risk can be divided into transaction risk, translation risk (accounting risk), economic risk (business risk).
The possibility that the economic subject will suffer losses due to changes in the transaction of using foreign currency.
Transaction risk mainly occurs in the following occasions :(1) risks in the import and export of goods and services.
(2) Risks of capital import and export.
(3) Risks held by foreign exchange banks.
Accounting risk, also known as accounting risk, refers to the possibility of book loss due to exchange rate changes when converting functional currency into functional currency in the accounting treatment of balance sheet by economic entities.
Functional currency refers to various currencies used in the circulation of economic subjects and business activities.
Functional currency refers to the reporting currency, usually the domestic currency, used in the preparation of consolidated financial statements.
Also known as business risk, it refers to a potential loss caused by unexpected exchange rate changes that affect the production and sales quantity, price and cost of an enterprise and cause a decrease in earnings or cash flow in a certain period in the future.
