Types of foreign currency risk
Risk that there will be losses when a subsidiary is translated into the parent company currency when doing consolidated accounts
Risk of exchange rates moving against you when buying and selling on credit, between the transaction date and actual payment date
Long term cashflow risk caused by exchange rate movements.
For example a UK exporter will struggle if sterling appreciated against the euro.
It is like a long term transaction risk
Options to manage these risks
Only deal in home currency ! (commercially acceptable?)
Do nothing ! (Saves transaction costs but is risky)
Leading - Receive early (offer discount) - expecting rate to depreciate
Lagging - Pay later if currency is depreciating
Matching - Use foreign currency bank account - so matching receipts with payments then risk is against the net balance
Another way of managing the risk is using:
Hedging, options, futures, swaps and forward rates - more of these later!