This document discusses foreign exchange risk and its management. It defines foreign exchange as the conversion of one currency to another, which poses risks from exchange rates and timing. Risk management involves identifying and mitigating uncertainty in investments. Foreign exchange risk specifically refers to unanticipated changes in exchange rates that can harm multinational businesses and investors. There are four main types of foreign exchange risk exposures: transaction, economic, translation, and contingent. The document also briefly discusses measuring financial risk and conditions where foreign exchange risk is irrelevant.

1. FOREIGN EXCHANGE RISK
BY :
SARABJEET SINGH DUA
MBA (Marketing)
Sarabjeetsinghdua10@gmail.com

2. WHAT IS FOREIGN EXCHANGE
Foreign exchange, or Forex, is the
conversion of one country's currency into
that of another. The complexity arises from
three factors:
• What is the foreign exchange exposure
• What will be the rate of exchange, and
• When does the actual exchange occur.

3. WHAT IS RISK MANAGEMENT
The process of identification, analysis and either
acceptance or mitigation of uncertainty in investment
decision-making. Essentially, risk management occurs
anytime an investor or fund manager analyzes and
attempts to quantify the potential for losses in an
investment and then takes the appropriate action (or
inaction) given their investment objectives and risk
tolerance.

4. FOREX RISK
Foreign exchange risk (also known as exchange rate risk
or currency risk) is a financial risk posed by an exposure
to unanticipated changes in the exchange rate between
two currencies.
Investors and multinational businesses exporting or
importing goods and services or making foreign
investments throughout the global economy
are faced with an exchange rate risk
which can have severe financial
consequences if not
managed appropriately.

5. TYPES OF RISK EXPOSURES
•TRANSACTION EXPOSURE
•ECONOMIC EXPOSURE
•TRANSLATION EXPOSURE
•CONTINGENT EXPOSURE
These exposures pose risks to
firms' cash flows, competitiveness,
market value, and financial
reporting

6. TYPES OF RISK EXPOSURES
TRANSACTION EXPOSURE
A firm has transaction exposure whenever it has
contractual cash flows (receivables and payables) whose
values are subject to unanticipated changes in exchange
rates due to a contract being denominated in a foreign
currency.

7. TYPES OF RISK EXPOSURES
ECONOMIC EXPOSURE
A firm has economic exposure (also known as operating
exposure) to the degree that its market value is
influenced by unexpected exchange rate fluctuations.
Such exchange rate adjustments can severely affect the
firm's position with regards to its competitors, the firm's
future cash flows, and ultimately the firm's value.

8. TYPES OF RISK EXPOSURES
TRANSLATION EXPOSURE
A firm's translation exposure is the extent to which its
financial reporting is affected by exchange rate
movements. As all firms generally must prepare
consolidated financial statements for reporting
purposes, the consolidation process for multinationals
entails translating foreign assets and
liabilities or the financial
statements of foreign
subsidiaries from foreign to
domestic currency.

9. TYPES OF RISK EXPOSURES
CONTINGENT EXPOSURE
A firm has contingent exposure when bidding for
foreign projects or negotiating
other contracts or foreign
direct investments. Such an
exposure arises from the
potential for a firm to suddenly
face a transactional or
economic foreign exchange risk,
contingent on the outcome of
some contract or negotiation.

10. MEASUREMENT OF FINANCIAL RISK
If foreign exchange markets are efficient such that purchasing
power parity, interest rate parity, and the international Fisher
effect hold true, a firm or investor needn't protect against foreign
exchange risk due to an indifference toward international
investment decisions. A deviation from one or more of the three
international parity conditions generally needs to occur for an
exposure to foreign exchange risk.
Financial risk is most commonly measured in terms of the variance
or standard deviation of a variable such as percentage returns or
rates of change

11. THANK YOU