Currency Risks and Their Classification

All participants in the international currency market are currency risks, ie risk of loss in the exercise of those or other operations. Currency risks associated with inflation and currency fluctuation. If exchange rates were fixed, there would be no currency risk. The objective basis of currency risk is that in the long run, exchange rates depend on the economic situation of different countries, but in short - on the decisions of public authorities on economic issues, speculative transactions, rumors and expectations, political events, and, finally, from the wrong solutions dealers.

Exporters suffer from losses in the depreciation rates against the currency of payment because they receive less real value in comparison with the contract. For importing risks arise if the rate rises against the currency of payment.

For a bank that buys one currency and selling another, the possibility of risk depends on its foreign exchange position, that is, the ratio of claims and liabilities of the bank in foreign currency. If the requirements and obligations with respect to a particular currency equal, then the foreign exchange position is closed, and for parts - open. The open foreign exchange position may be short, if the liabilities and obligations of the sold currency assets and exceed the requirements for it, and a long, if the assets and requirements for purchased foreign currency exceed the liabilities and obligations. Open position as long and short, is always associated with the risk of loss if, prior to the date of purchase previously sold the currency and selling previously purchased, the rate of these currencies will change in an unfavorable direction for the bank.

Exchange rate risks are divided into categories:

 • Operational;

• Accounting;

• Economic.

Operating currency risk - the risk is, which lend themselves to companies and individuals when future payments or the proceeds should be made in a currency whose future value is not defined. Currency risks from changes in exchange rates may be associated with the movement of cash and assets. They can occur in the short term and long term. Changes in exchange rates may lead to changes in the inputs needed for production company, as well as a change in revenues from production. The risk in the long term (current) touches the entire investment.

Accounting currency risk relates to the operation of the financial statements of the company transfer from one currency to another. It is associated with the change of recorded data on the company's financial condition, caused by changes in the exchange rate used to convert the financial statements.

The economic exchange rate risk associated with changes in value of the company, which occur due to changes in exchange rates. Value of the company is the market price of shares multiplied by the number of shares outstanding.

The market price - the price at which supply and demand are equal to each other.

Changes in exchange rates affect the market value of the company when they apply to the expected cash flows.

The economic exchange rate risk is the most common type of risk associated with exchange rates. It includes a host and operating, and accounting risks. On the economic consequences of the currency risk due to unexpected fluctuations in rates may face not only international firms, but firms that are not associated with foreign agreements.
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