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Currency risk is divided into the following types:
- economic risk
- operational risk
- transmitting risk
Economic risk refers to future contract transactions.
Economic risk is long-term, related to the future development of the company and more easily predicted.
If a company regularly buys or sells goods overseas, it constantly faces the risk of reduced revenue or rising costs associated with adverse currency changes.
Such a long-term risk is called economic.
In international trade, there is a risk of loss to any company that incurs expenses in one currency and revenues in another.
Any changes in the exchange rates may lead to deterioration or improvement of the financial and market position of the company.
Economic risks arise if the company plans to enter into separate contracts or carry out operations in the future.
Economic risks are long-term and potentially the most dangerous manifestations of foreign currency risks.
Economic risk can have the most detrimental consequences for the development strategy of large companies.
There are two main consequences of economic risk to the company in case of unfavourable exchange rate change:
- Reduce profit on future transactions. Such economic risk is called direct;
- loss of some price competitiveness compared to foreign producers. This economic risk is called indirect.
Direct economic risk comes from future operations.
After the transaction is concluded, the direct economic risk is transformed into operational risk.
An example of a risk of loss is a bid for a contract valued in a foreign currency or a price list in a foreign currency.
Any company buying or selling goods abroad is exposed to direct economic risk.
Indirect economic risk includes changes in cost and price competitiveness caused by currency movements.
Indirect economic risk refers to the risk of loss due to the deterioration of the competitiveness of a given company compared to foreign (or even domestic) competitors caused by relatively high costs or relatively low prices due to currency movements.
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