The General Concept of the Exchange Rate Risk

There are operational, translational and economic risks, which at first glance are not evident. For example, a supplier in the domestic market can use the imported resources, and the company enjoys the services of a provider, indirectly exposed to operational risk, as the rising cost of supplier costs resulting from currency depreciation would cause the supplier to raise prices. Another example would be the situation with the importer, who issued an invoice in local currency, and who discovers that the prices change its foreign supplier in accordance with changes in the exchange rate in order to ensure consistency of prices in the currency of the supplier

Hidden operating and (or) translational risks may arise in the event that the foreign subsidiary is subject to its own risks. Suppose that the U.S. subsidiary of British company exports its products to Australia. For the U.S. subsidiary of the risk of losses from exchange rate of Australian dollar, and it may suffer losses as a result of unfavorable changes of the Australian dollar against the U.S. dollar. Such losses will undermine the profitability of the branch. There is an indirect operational risk, as the receipt of income from the subsidiary company will be reduced. The parent company also faces translational risk, if the reduction in profits from the subsidiary will be reflected in the valuation of assets of the branch in the balance sheet of the parent company.
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