Currency risk is the possibility that exchange-rate changes alter the home-currency value of cash flows, balances or business commitments. It can arise between quotation, order, invoice, payment and accounting dates whenever currencies differ.
What types of currency risk exist?
- Transaction risk on contracted foreign-currency cash flows
- Translation risk on foreign balances and financial statements
- Economic risk on future competitiveness and demand
- Settlement risk when currencies move at different times
How can transaction exposure be illustrated?
If a business expects to pay EUR 100,000, the home-currency cost is USD 108,000 at 1.08 USD per EUR and USD 112,000 at 1.12. The illustrative adverse movement increases cost by $112,000 − $108,000 = $4,000, before fees.
Currency risk vs. FX markup
Currency risk comes from changes in market exchange rates over time. FX markup is the difference a provider applies to a benchmark rate for a conversion. A transaction can face both.
How can risk be managed?
Identify exposures by currency and date, match inflows with outflows, choose invoice currency deliberately, shorten open periods or use suitable hedging instruments. Controls should reflect materiality and should not imply that a hedge removes every basis, timing or counterparty risk.
