Describe about the foreign currency risk.
Describe about the foreign currency risk.
Foreign currency- As we know every country has its own currencies in which it operates. Hence, currency of overseas countries are referred as foreign currency by the home country.
Foreign currency risk is also known as exchange rate risk.
The traders, investors or the companies may involve in many financial transactions or business operations across other countries. Here the exchange rate plays a dominant role. When the prices of one currency change in relation to other, we call it a exchange rate difference. There are times when there are heavy fluctuations in the exchange rates or frequent changes- All these leads to foreign currency risk or exchange rate risk. These can lead to either unpredictable profits or losses due to these changes in value of one currency against another.
The exchange rate risk is for both closed trades as well as import/exports businesses. In closed trade, the profit or loss is converted to investor's base currency. Thus the fluctuation in exchange rate can affect this conversion and lead to reduction in expected amount. Similarly, for import & export businesses, the fluctuations in exchange rate directly affects the accounts payable and receivables.
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