3 types of Forex (Foreign exchange) Risk and Exposure

Managing foreign exchange (or forex) risk is essential to successful investment in the forex market.

Foreign exchange exposure or risk can be classified into three types: transaction, economic and translation exposure.

Transaction exposure refers to the extent to which the future cash transactions of the firm may be affected by any changes in the currency exchange rate.

Economic exposure measures the impact of changes in exchange rate on the firm&'s cash flows and earnings.

Translation exposure refers to accounting exposure. It measures the impact of changes in exchange rate on the financial statements of the group of company.

Most companies attempt to minimize the risk of fluctuating exchange rates by using hedging instruments such as Forward Exchange Contracts, Money Market Hedge, Futures, Options and Swaps.

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