What is foreign exchange risk? What are the three types of foreign exchange risk?

Investment speculators in the foreign exchange market often talk about how to make money in the foreign exchange market. But if we look at it from another angle, we regard the fluctuations in the global foreign exchange market as risks. Whether it is an individual, bank, or enterprise participating in foreign exchange transactions, as long as there is foreign exchange, there is foreign exchange risk. Generally speaking, people refer to "the loss suffered due to exchange rate changes and the possibility of losing expected benefits" as foreign exchange risk. The amount of foreign currency exposed to foreign exchange risk is also often referred to as the "risked portion."

Since the implementation of the floating exchange rate system in 1973, currency exchange rates have fluctuated frequently, not only in large amplitudes, but also in situations where the strength and status of major currencies often change. Before my country's reform and opening up, because China had always implemented strict foreign exchange management, the exchange rate adjustment mechanism was rigid, and most foreign-related enterprises did not truly become the main body responsible for their own profits and losses, so foreign exchange risks were mainly borne by the state. With the advancement of my country's foreign exchange system reform and my country's entry into the WTO, banks and enterprises can no longer rely on the protection of the government. Therefore, how to prevent foreign exchange risks has become an urgent concern for banks, enterprises, and individuals.

One of the manifestations of foreign exchange risk is: foreign exchange trading risk. Foreign exchange risk arises due to the exchange of domestic currency and foreign currency. The risks borne by foreign exchange banks that engage in foreign exchange trading are mainly foreign exchange risks. The same risks occur when enterprises other than banks make loans or borrowings in foreign currencies and conduct foreign exchange transactions accompanying foreign currency loans or borrowings. There are also risks involved in personal buying and selling of foreign exchange.

The second manifestation of foreign exchange risk is: exchanging domestic currency with foreign currency for future foreign exchange transactions. Since the exchange rate applicable to future transactions is not determined, there is a risk. This is a risk that occurs when general enterprises conduct trade transactions and non-trade transactions denominated in foreign currencies, so it is also called "transaction settlement risk."

The third manifestation of foreign exchange risk is: how to evaluate enterprises in domestic currency when conducting accounting processing and final settlement of foreign currency claims and debts. For example, when handling final accounts, when evaluating claims and debts, differences in book profits and losses will occur due to different applicable exchange rates. Therefore, it is also called "evaluation risk" or "foreign exchange translation risk."

The fourth manifestation of foreign exchange risk is: Economic risk - refers to the risk that the future expected income of an enterprise or individual may be lost due to changes in exchange rates.

The fifth manifestation of foreign exchange risk is: country risk - that is, political risk. It refers to the possibility of losses caused by the termination of foreign exchange transactions of enterprises or individuals due to state coercion. Source: fx678

Foreign exchange risk (ForeignExchangeExposure) refers to the management and operation of foreign economic, trade, finance, and foreign exchange reserves by a financial company, business organization, economic entity, country or individual within a certain period of time. , the possibility that the value of assets (credits, equity) and liabilities (debts, obligations) expressed in foreign currencies will increase or decrease due to unexpected changes in foreign exchange rates.

There are three types of foreign exchange risks

1. Corporate foreign exchange risks

1. Transaction risk

2. Accounting risk

3. Economic risks

2. Business risks

1. Foreign exchange trading risks - banks and foreign exchange trading business: trading on behalf of customers and proprietary trading

2. Foreign exchange credit risk: the risk brought to the bank due to the breach of contract by the parties in foreign exchange transactions.

3. Settlement risk

3. National foreign exchange reserve risk

The risk of all foreign exchange reserves of a country due to the depreciation of the reserve currency . It mainly includes national foreign exchange inventory risks and national foreign exchange reserve investment risks.

Since the international community implemented a floating exchange rate system in 1973, the foreign exchange reserves of all countries in the world have faced the same operating environment, that is, diversification of reserve currencies. The reserve currency is mainly the US dollar. Reserves including the US dollar Currency exchange rates fluctuate widely. In this way, the foreign exchange reserves of various countries face great risks.

Since foreign exchange reserves are the most important component of international solvency and an important symbol of a country's national strength, once the risks faced by foreign exchange reserves materialize, the consequences will be very serious.

Judging from the field in which it occurs, foreign exchange risk can be roughly divided into two categories: commercial exchange rate risk and financial exchange rate risk.

Commercial exchange rate risk: Commercial exchange rate risk is mainly It refers to the possibility of people suffering losses due to exchange rate changes in international trade. It is the most common and important risk in foreign exchange risks.

Financial exchange rate risk: Financial exchange rate risk includes creditor debt risk and reserve risk. What is foreign exchange risk? What types of foreign exchange risks can be divided?

Foreign exchange risk (ForeignExchangeExposure) refers to the external economic, trade, financial, and foreign exchange reserves of a financial company, business organization, economic entity, country or individual within a certain period of time. In management and operation activities, the value of assets (claims, equity) and liabilities (debts, obligations) expressed in foreign currencies may increase or decrease due to unexpected changes in foreign exchange rates.

There are three types of foreign exchange risk:

Transaction risk, which refers to the risk that occurs in operating activities;

Translation risk, which refers to overseas subsidiaries The risk that the value of assets and liabilities will change due to changes in exchange rates when the financial statements are denominated in foreign currencies and consolidated into the financial statements of the parent company;

Economic risk, which refers to the value of the company due to unanticipated changes in future operating income. changes caused by changes in exchange rates.

What is the meaning of foreign exchange risk? What are the types of foreign exchange risks?

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What is Exchange rate risk?

Exchange rate risk, also known as foreign exchange risk, refers to the possibility of losses due to exchange rate changes in economic activities where economic entities hold or use foreign exchange.

Types of foreign exchange risks: transaction risk, conversion risk, economic risk.

1. Transaction exchange rate risk: In transactions priced and paid in foreign currencies, the possibility of economic entities suffering losses due to changes in foreign exchange rates. Transaction risks mainly occur in the following situations:

(1) Risks in the import and export of goods and services ***.

(2) Risks of capital input and output.

(3) Risks of foreign exchange positions held by foreign exchange banks.

2. Conversion exchange rate risk, also known as accounting risk, refers to the possibility of book losses due to exchange rate changes when the functional currency is converted into the accounting currency in the accounting treatment of the balance sheet by the economic entity. sex. Functional currency refers to the various currencies used in circulation among economic entities and business activities. Accounting currency refers to the reporting currency, usually the national currency, used in the preparation of consolidated financial statements.

3. Economic exchange rate risk, also known as operating risk, refers to an unexpected exchange rate change that affects the company's production and sales volume, price, and cost, causing a reduction in the company's income or cash flow in a certain period in the future. potential losses.

Main measures to resolve exchange rate risks:

(1) Select the appropriate contract currency.

In economic transactions such as foreign trade and lending, the choice of currency as the pricing currency is directly related to whether the transaction entity will bear exchange rate risks. In order to avoid exchange rate risks, enterprises should strive to use the domestic currency as the contract currency, use hard currency when exporting products and capital, and use soft currency when importing capital. At the same time, measures such as value preservation clauses should be added to the contract.

(2) Through hedging operations in the financial market. The main methods include spot exchange trading, futures trading, futures exchange trading, options trading, borrowing and investment, interest rate-currency swaps, foreign currency bill discounting, etc.

(3) The translation risks generated by economic entities during the balance sheet accounting process are generally resolved by implementing balance sheet hedging. This method requires that the amount of insured assets and insured liabilities expressed in various functional currencies on the balance sheet is equal, so that its translation risk position is zero. Only in this way, exchange rate changes will not cause translation losses.

(4) Business diversification. That is, by diversifying its sales, production and raw material sources internationally, through the diversification of international operations, when the exchange rate changes, the management department can compare the changes in production, sales and costs in different regions to find advantages and avoid disadvantages, and increase sales. A change in the exchange rate is beneficial to the production of branches, while a reduction in the exchange rate is unfavorable to the production of branches.

(5) Financial diversification. That is, seeking the sources and destinations of funds in multiple currencies in multiple financial markets, and diversifying financing and investment, so that when some foreign currencies depreciate and some appreciate, the company can make most of the Foreign exchange risks offset each other to achieve the purpose of risk prevention. What are the types of domestic foreign exchange risks?

Foreign exchange risks can mainly include: transaction risk, conversion risk and operational risk.

Transaction risk

When an enterprise forms obligations and responsibilities with transaction parties in the form of a contract, and the contract is denominated in a non-accounting functional currency, transaction risk generated immediately. The manifestations may include: orders for goods not delivered or services provided, various forms of receivables and payables, and determined future capital inflows or outflows.

For example: A Chinese company signed an export contract denominated in US dollars with an American company. Chinese companies will face exchange rate risks from the day they sign a U.S. dollar order to the time they receive payment. Especially with the current trend of the RMB rising and the U.S. dollar falling, the corporate risks are even greater.

Statement translation risk

According to accounting procedures, companies must prepare consolidated financial statements at the end of each fiscal year. If a company is overseas, it may be exposed to translation risk. The domestic parent company re-expresses the financial statements of its overseas affiliates expressed in foreign currencies in the parent company's accounting functional currency and then prepares consolidated financial statements. Changes in the conversion exchange rate may cause an increase or decrease in the parent company's net worth or net profit.

Operational risk

Operational risk refers to the possibility that the domestic currency value of a company's non-contractual cash flows may change due to unexpected changes in real exchange rates, thus affecting the overall value of the company. The extent to which a company is exposed to operational risk is a measure of the extent to which changes in real exchange rates will affect the company's overall value. Operational risk is mainly caused by changes in the real exchange rate caused by relative changes in economic factors between the two countries, which in turn affects the company's competitive situation in the international market. Therefore, operational risk is also called competitive risk.

The fourth manifestation of foreign exchange risk is: Economic risk - refers to the risk that the future expected income of an enterprise or individual may be lost due to changes in exchange rates.

Case 7 Foreign exchange risk case: Peregrine bankruptcy case

Peregrine Investments Holdings Limited was established at the end of 1988 , founded in Hong Kong by Group Chairman To Huilian and Director and General Manager Liang Botao. In just a few years, its business has spread throughout the Asia-Pacific region. The group mainly provides customers with various types of comprehensive investment banking and securities brokerage services. Peregrine has grown from an initial capital of HK$300 million to a multinational investment bank with total assets of HK$24 billion. It has 28 branches in Southeast Asia, Europe and the United States, and its business covers securities, futures brokerage, fund management, investment financing, and underwriting. Listed etc.

In the second half of 1997, a financial crisis broke out that wiped out the world. During this financial crisis, the exchange rates of Thailand, Philippines, Malaysian git, Indonesian rupiah and Singapore dollar fell sharply against the US dollar, setting new records repeatedly. New low. Since Peregrine invested heavily in the Southeast Asian market and held huge claims in Asian currencies, the collapse of Southeast Asian currencies caused irreparable losses to it.

At the same time, the turmoil in the foreign exchange market also brought about a plunge in the stock market. On October 23, the Hang Seng Index plummeted from 11,700 points to 10,426 points, a drop of 10.4%. On October 24, the Hang Seng Index rebounded slightly, but on October 28, the Hang Seng Index plunged again by 1,438 points, setting a historical record, and closed at 9,059 points. From October 20 to 28, the Hang Seng Index fell by 4,541 points in just a few days, a drop of 33.4%. If calculated based on the market value of the Hong Kong stock market of US$300 billion on July 3, the loss would have been approximately US$140 billion by October 28. As a company engaged in securities business, Peregrine's stock losses from July to October 1997 are estimated to be at least nearly 1 billion Hong Kong dollars.

At 5 pm on January 12, 1998, Peregrine declared bankruptcy.

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Case analysis questions January 20×7, China Group Corporation An export order of US$10 million was signed with a company in the United States. At that time, the US dollar/RMB exchange rate was 7.20. When the delivery was delivered 6 months later, the RMB had greatly appreciated, and the US dollar/RMB exchange rate was 7.00. Due to the change in the RMB exchange rate, the company lost money. 2 million yuan.

After this incident, in order to strengthen foreign exchange risk management and effectively improve the company's foreign exchange risk prevention level, the company held a high-level meeting on the company's strengthening of foreign exchange risk management in March 20×7, summarizing the Formulate the company's foreign exchange risk management countermeasures based on the experience and lessons learned from the occurrence of losses. The key points of the relevant personnel's speeches are as follows:

General Manager Chen: Let me make two points first: (1) It is very important to strengthen foreign exchange risk management, and this issue must be paid great attention to. (2) Foreign exchange risk management should focus on the key points, especially the management of transaction risks and translation risks. Practical measures must be formulated to prevent exchange rate changes from eroding company profits.

Executive Deputy General Manager Wu: I completely agree with the general manager’s opinion. In the context of a relatively stable RMB exchange rate, as long as we focus on production and complete orders, the profit will not be enough. However, the current RMB exchange rate in our country is The formation mechanism has changed. We can no longer stick to the past management methods and ignore exchange rate risks. We must take necessary measures to preserve the value of all foreign exchange assets and foreign exchange liabilities. In addition, the general manager's point of view on strengthening translation risk management is also very important. Our overseas subsidiaries are about to be put into operation. Necessary measures should be taken to hedge translation risks to avoid book losses.

Chief Accountant Li: Strengthening foreign exchange management is indeed very important. I recently conducted preliminary research on issues related to foreign exchange risk management and found that there are still many financial instruments for foreign exchange risk management. When using any financial instrument for risk hedging, you will lose the benefits of favorable changes in the exchange rate. The gains, losses and gains of foreign exchange mainly depend on the time and magnitude of exchange rate changes. Therefore, to strengthen foreign exchange risk management, we must first pay attention to the study of exchange rate change trends, and adopt different countermeasures according to different exchange rate change trends.

Chairman Zhang: I agree with everyone’s speeches above. I would like to make two final comments: (1) The ideological understanding must be in place. Since July 21, 2005, my country has implemented a managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies. The RMB exchange rate is no longer pegged to a single U.S. dollar, forming a more flexible RMB exchange rate mechanism. Against the backdrop of this macroeconomic outlook, it is necessary to take measures to strengthen foreign exchange risk management. (2) It is recommended that the Finance Department set up a foreign exchange risk management team, with the manager of the Finance Department as the team leader and specifically responsible for the daily work of foreign exchange risk management.

Requirements:

(1) Is the exchange rate given in the question using the direct pricing method or the indirect pricing method?

(2) What kind of risk does the example in the question reflect?

(3) From the perspective of the basic principles of foreign exchange risk management, point out the inappropriate views of General Manager Chen, Executive Deputy General Manager Wu, Chief Accountant Li and Chairman Wu in their speeches at the meeting What? And briefly explain the reasons respectively.

Analysis tips

(1) Direct pricing method

(2) Transaction risk

(3)

——General Manager Chen:

The views on the focus of foreign exchange risk management are inappropriate.

Reason: For an enterprise, economic risk is more important than translation risk and transaction risk, because its impact is long-term, while the impact of translation risk and transaction risk is one-time.

——Executive Deputy General Manager Wu:

(1) The view of taking value preservation measures for all foreign exchange assets and foreign exchange liabilities is inappropriate.

Reason: Foreign exchange assets and liabilities may increase or decrease in value due to changes in exchange rates. This increase or decrease may be naturally offset, so there is no need to take value preservation measures for all foreign exchange assets and foreign exchange liabilities.

(2) The view of hedging translation risk is inappropriate.

Reason: Reducing translation risk may increase transaction risk. Therefore, if the translation risk does not affect cash flow, there is no need to hedge the translation risk.

—— Chief Accountant Li:

(1) “When using any kind of financial instrument for hedging, you will also lose the benefits brought by the favorable exchange rate changes. "The view is inappropriate.

Reason: Using forward foreign exchange transactions, foreign exchange futures and other financial instruments to avoid risks, by locking the exchange rate, you can avoid losses caused by adverse changes in the exchange rate, but at the same time, you also lose the benefits brought by favorable changes in the exchange rate. By using foreign exchange option financial instruments for hedging, you can not only avoid losses caused by adverse changes in the exchange rate, but also enjoy the benefits brought by favorable changes in the exchange rate.

(2) The view that "losses and gains in foreign exchange mainly depend on the time and magnitude of exchange rate changes" is inappropriate.

Reason: Foreign exchange losses and gains depend on three factors: (1) foreign exchange exposure affected by exchange rate changes; (2) the degree of impact of exchange rate changes on foreign exchange assets and liabilities; (3) exchange rate The time and magnitude of changes.

——Chairman Zhang:

“It is recommended that the Finance Department set up a foreign exchange risk management team, with the Finance Department manager as the team leader and specifically responsible for the daily work of foreign exchange risk management.” The point of view is inappropriate.

Reason: Foreign exchange risk includes economic risk, transaction risk and translation risk. Economic risk involves all aspects of operation and management such as production, sales, raw material supply and location. Therefore, the management of economic risk goes beyond the financial department. Rather, it requires the joint efforts of all departments to achieve the purpose of managing economic risks by adjusting corporate business strategies and adopting internal management methods. What are the risks of foreign exchange risk.

Foreign exchange rates are affected by many factors and are unpredictable. Customers may make profits or suffer losses when conducting real foreign exchange transactions, depending on whether the customer's judgment of the market conditions is accurate.

The above information is answered by Parkway Australia. What does “foreign exchange risk” mean? How to measure and confirm “foreign exchange risk”?

The risks in the foreign exchange industry are huge. As for how much you have to bear, it depends on how you make your investment plan. There are two ways to do foreign exchange: 1. Make orders by yourself. In this case, the risk is completely borne by the individual. The profit and loss of the account also depends on personal operations. 2. Valet trading Although this service is not recognized by national laws in a sense, among the private sector, there are still many people doing this business. Generally speaking, if you can find a relatively good one The trading team and customers may need to bear the risks stipulated in the contract. Is it risky to do foreign exchange?

The higher the risk, the higher the income. Risk and income are directly proportional. But in foreign exchange, if you are optimistic about the market, you can control the stop loss very well, and the risks will be avoided.

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