Foreign Currency Risk Management

Foreign Currency Risk Management- Foreign exchange risk applies to the losses that an international financial transaction may acquire due to currency changes. Also known as currency risk, FX risk, and exchange-rate risk, it illustrates the possibility that an investment’s value may decrease due to changes in the relative value of the involved currencies. Investors may experience jurisdiction risk in the form of foreign exchange risk.

Foreign exchange risk arises when a company engages in financial transactions denominated in a currency other than the currency where that company is based. Any appreciation/depreciation of the base currency or the depreciation/appreciation of the denominated currency will affect the cash flows emanating from that transaction. Foreign exchange risk can also affect investors, who trade in international markets, and businesses engaged in the import/export of products or services to multiple countries.

Risk management in banks has changed substantially over the past ten years. The regulations that emerged from the global financial crisis and the fines that were levied in its wake triggered a wave of change in risk functions. These included more detailed and demanding capital, leverage, liquidity, and funding requirements, as well as higher standards for risk reporting.

The risk applies to decision-making conditions under which all possible outcomes and their probability of circumstances are known to the decision-maker, and uncertainty introduces to situations under which each the outcomes and/or their probabilities of events are unknown to the decision-maker.

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