Kinds of currency risks

According to economics theory, hedge is an instrument used to insure the risks of uncertainty and high volatility of currency rates. The currency risks can be divided into 2 groups:

1. Economic risk – long-term influence of currency rates on competitiveness of a company and its cost as a result.
   The are two sources of an economic currency risk:
   a) Direct – for the export company the strengthening of the national currency can be the reason of the increase of the cost of the product or the existing margin reduction. It is possible that the share of the market and profitability will decrease for the company;
   b) Indirect – the change in the currency rates of the countries where the main competitors are located can vitally influence the competitiveness of the company on a particular market;
2. Translational risk – a risk of a negative currency reevaluation in the base currency during the consolidation of the financial statements of abroad subsidiaries into an overall financial statement;
3. Transactional risk – a risk of currency rate change from the moment of signing the agreement until the payment in the foreign currency. This risk appears between the budgeting date/date of signing the agreement and the date of calculation made in the foreign currency. This kind of risk directly influences the cash flow of companies, and companies more often use hedging instruments to insure it.
   Hedging can’t fully compensate the losses connected to the currency fluctuations, but it allows the company to increase its reserves of upcoming purchases and helps the management staff to concentrate on business aspects in which the company is competitively superior.
   That’s why creating hedging instruments on Hedge.Pro helps the investors all around the world to acquire one more beneficial insuring instrument.
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