What is Foreign Exchange Risk? Which Type of Organisations Can It Affect the Most?

Foreign Exchange Risk is a crucial part of every business, be it in any sector or industry. Without managing risk, a business cannot expect to succeed or grow. This is where the role of a risk management professional comes in. Professionals who are well-versed in risk management are always in demand, especially in a business environment that is highly volatile and ambiguous.

Risk management is a broader aspect, but today’s topic is foreign exchange risk. Let’s see what a foreign exchange risk is, which type of organisationsdoes it affect the most, and why you should know about it.

Foreign Exchange Risk: An Introduction

When an organisation decides to enter the international market, any risk that is concerned with currency fluctuation is known as foreign exchange risk. It entails the possibility that an investment or transaction’s value may decrease due to the change in the value of currencies involved. So, if you are a financial risk management professional who’s trying to expand their horizons, foreign exchange risk management is the ideal choice. Since organisations all over the world are moving towardsglobalisation and exports, the demand for such professionals is never going to run out.

Understanding the Three Basic Types of Foreign Exchange Risk

Let’s understand what type of risks you’ll be handling after landing a job in this domain.

  • Transaction Risk

The risks concerned with purchasing a product from a company located in another country are known as transactional risks. The price of the product is always denominated in the selling company’s country. So, if the currency of the selling company’s country appreciates, your organisation has to pay more than the agreed price. To understand how to handle and manage such risks, consider pursuing finance online courses.

  • Economic Risk

Economic risks, also known as forecast risks, are concerned with the situation wherein the market value of the company is impacted by unavoidable exposure to currency fluctuations.

  • Translation Risk

Translation risks occur when a parent company owning a subsidiary in a foreign country faces losses. Such losses are often denominated in that country’s currency and have to be translated back to the parent company’s currency. For instance, an Indian company has a subsidiary in the USA that is suffering losses. Now, the losses are denominated in dollars, which are then translated to Indian rupees. Now, as you all know that the value of the dollar is higher, which means the sum of losses is also going to be higher when converted into Indian rupees. Such type of risk is known as translation risk.

Which Type of Organisations Does Foreign Exchange Risk Affect the Most?

Foreign exchange risks affect the organisations that conduct business or have operations in a different country as that of the headquarters. Foreign risk can also affect investors who trade in international markets and are engaged in the business of import or export of product or services to multiple countries.

Learn More About Foreign Exchange Risk

If you are a working-class professional, you understand the quitting your job for higher studies is not easy. This is where finance online courses lend a hand. By allowing professionals to study with their jobs or other commitments, finance online courses help in career progression. One such course that can help you is the AFRM online professional program by IIM Raipur. Offered on one of the most reputed Edtech platforms, Talentedge, the AFRM online professional program by IIM Raipur strives to familiarise professionals with risk and derivatives markets which includes structures and functions of financial institutions, foreign exchange risk, corporate bonds, Mortgage-backed securities, Value-at-Risk (VaR), etc.

Additionally, by backing up your claim of expertise from IIM Raipur, one of the top B-schools in the country, you’ll be opening yourself up to a lot of new job opportunities. So consider enrolling the AFRM online professional program by IIM Raipur and advance your career.

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