Currency risks are an integral part of commercial risks to which all participants in financial relations, both within the state and abroad, are exposed. Such risks are directly related to the activities of large banking concerns, as well as other enterprises that have concentrated large amounts of money in their hands.
What are currency risks?
Currency risk, according to the generally accepted economic definition, is the risk of losing part of the profit in such financial actions as: exchange, purchase, sale of foreign currency, etc. Since the exchange rate is in constant motion, then those individuals most often suffer from such fluctuations, and also legal organizations that do not have the ability to set a fixed cost. Fixing a currency can only be carried out by concluding a special written agreement.
Monetary risks are directly related to the activities of banks, large stock exchanges, as well as other large structures that have huge amounts of money at their disposal. It is almost impossible to determine the exact reason for this or that currency risk, since there can be a lot of these reasons. Most often, a decrease or increase in prices for a currency depends on its position both in the external market and in the internal one. The uneven distribution of finances between countries, as well as the speculative policy of large banking concerns, have no less influence.
It is possible to achieve a reduction in exchange rate risks subject to strict control over exchange rate fluctuations, as well as constant monitoring of external government and internal financial changes. Since the control procedure itself is not easy, almost all large organizations have a special position. The employee is responsible for tracking and possibly preventing currency risks or at least reducing financial losses for this particular company.
In order to prevent large consequences of currency risks, specialists in the economic field have developed a special classification that allows banking organizations to more effectively pursue financial policies.
Existing types of currency risks
At the moment, experts in the economic sphere distinguish the following types of currency risks that can form with the organization's short-sighted policy in the field of finance:
1. Operational risks. This type arises in the case of an entrepreneur performing any trading operations related to investment deposits and interest return. The following situation can be given as an example. A buyer who purchases a product in a foreign country is forced to change the currency of his home country to another. At the same time, he loses a certain amount of money on the exchange rate.
2. Translational risk. This type of risk arises most often in organizations that have subsidiaries abroad, where there is often a difference between passive and active income. For example, a Russian firm that has branches in the United States has dollar assets. In the event of a sudden shortage of the dollar to cover the total value of assets, her fortune may become noticeably shaken against the background of competitors. And in this situation, the amount of rubles at the disposal of the company does not matter.
3. Economic risk. This type of risk is directly related to the negative impact of a change in the exchange rate. In the event of sudden surges, the company may find itself in a difficult financial position.
In addition to the three main types of currency risk, specialists also distinguish three additional types:
1. Hidden currency risks. This type occurs in cases where the company does not monitor the impact of the external and internal economic situation on its functioning. Or if some important points are systematically missed by the organization's specialists.
2. Insurance currency risks. This type of risk is present when investing and manifests itself in the event of a possible late delivery of currency. The reasons usually do not depend on the suppliers themselves. Restrictions or heavy duties imposed by the state can complicate the export or import of currency. The greatest risk is typical for countries whose currencies are recognized as non-convertible.
3. Exchange rate risks. This type of risk is directly related to monetary shocks. It can be divided into two types: accounting (exchange rate fluctuations are reflected in the company's financial statements when recalculated), monetary and economic (exchange rate changes affect the company's money flows, as well as investments and resources used).
