Foreign exchange risk

The risk of losses or other adverse effects resulting from a change in a foreign exchange rate, or from other unfavourable changes in relation to a foreign currency.

Examples include:

• A final receipt/payment of a different amount of domestic currency equivalent, than expected when a currency transaction was committed to (transaction risk)
• A change in asset/liability values in a balance sheet, or profit/loss in an income statement or both (translation risk)
• A change in competitiveness as rates change relative to buyers, suppliers or competitors (economic risk).

A more complex area of foreign exchange risk concerns contingent, or pre-transaction risk.

Foreign exchange risk is also known as Currency exposure or Currency risk.

See also

• Deal contingent forward
• Economic risk
• Exchange controls
• Foreign exchange
• Forward contract
• Lagging
• Leading
• Market Risk in the Banking Book (MRBB)
• Net investment hedge accounting
• Pre-transaction risk
• Risk management
• Transaction risk
• Translation risk

Other resource

• ACT Future Leaders Perspectives - FX risk management