The exchange rate risk is that the foreign debt borrowed must eventually be converted into foreign currency in the local currency or repaid with the foreign exchange obtained from the export of products.Exchange rate risk can be divided into transaction risk, translation risk (accounting risk) and economic risk (business risk).
Transaction exchange rate risk
The possibility that economic entities may suffer losses due to changes in foreign exchange rates in transactions denominated and paid in foreign currencies.Transaction risks mainly occur in the following occasions :
- risks in the import and export of goods and services.
- Risks of capital input and output.
- risks of foreign exchange positions held by foreign exchange banks.
Reduced risk
Also known as accounting risk, it refers to the possibility of book loss caused by exchange rate fluctuation when economic entities convert functional currency into accounting currency in the accounting treatment of balance sheet.Functional currency refers to various currencies used in circulation in economic subjects and business activities.Currency of account the reporting currency, usually the national currency, used in the preparation of consolidated financial statements.
The economic risks
Also known as operating risk, it refers to a potential loss caused by unexpected exchange rate fluctuations affecting the production and sales quantity, price and cost of an enterprise, resulting in the reduction of earnings or cash flow in a certain period of the future.