Risks of ownership
Risk management - foreign exchange risk - commodity risk.
It is helpful to separate foreign exchange and commodity risks into those risks arising from trading and those arising from ownership.
A business (or indeed any of its competitors) that has more than one currency or commodity element in any of its sales or costs will have risks arising from trading.
A business that owns operations with different reporting currencies will have risks of ownership. Let us look at some examples to understand this better.
A domestic airline will collect its fares in its local currency, as its market is purely domestic, but will pay many of its costs in US dollars, such as fuel and indeed the aircraft cost. This risk arises in its trading.
A Singapore-based consultant owns a US-based subsidiary, the business of which is completely domestic and has no exposure to any currency other than the US dollar. The Singapore parent must translate the US dollar revenues and balance sheet when it reports in Singapore dollars. There is no need to physically sell any of the US dollars. This is of no consequence to the US subsidiary, which think only in US dollars, and so is a risk of ownership.
Commodity risks can only be risks of trading.
(Source - Guide to risk management - the Treasurer's Wiki.)
See also
- Corporate treasury
- Enterprise risk management
- Foreign exchange risk
- Guide to risk management
- Hedging
- Natural hedge
- Non-transferable risk
- Risk identification
- Risk management
- Transferable risk
- Treasury
