Hello and welcome to my blog today.
Sometime last week I discussed about financial risk management under which I highlighted more on the sub topic, Credit risk. I Explained further what credit and credit risk management means, the reasons and events that could lead to risk and so on. Today I will be discussing another subtopic under financial risk management title "Foreign currency exposure."
Foreign risk exposure is very important for those doing business with different countries all over the world and they include:
Transaction exposure.
Translation exposure.
Economic exposure.
Transaction Exposure.
This has to do with risk of financial losses that occurs as a result of trading activities. Sometimes when two parties, companies or countries do business, one of the party might have decreament or increament while changing their various currencies. Under this kind of financial currency exposure we also have;
Extended transaction exposure.
It has to do with when you have to -do business with specific countries, you could also be exposed to financial losses.Pre-transaction exposure
This is a situation where by foreign parties agrees to buy and sell their products. For example, if a country and Nigeria decides to embark on a business together for a specific period of time and the I totally amount to be spend is $2 but on the day of payment the amount increases to $7, the business will still go on and the only means possible is to control the risk by the risk manager is Hedging. We have internal hedging which are mostly in banks and external hedging too.
Translation exposure.
When you do business with different countries using different currencies, when you decide to convert those currencies to a consolidated account, you will either experience an increments or deferment financially. If you incur a financial loss, it means you are exposed to foreign currency exposure.
Economic exposure.
It has to do with exposure rising from competition amongst parties or countries trading on similar kind of goods or products. If you're in a business and your competitors are stronger than you, it means that you are exposed to a risk that will lead to losses.
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