What are the risks of exchange rate exposure?
Date:2023-02-18
1. Profitability Risks: Exchange rate fluctuations can cause changes in profits and losses, as companies need to translate the profits made in one currency into the reporting currency. Natural hedging strategies can be used to overcome these risks, but they may be costly and ineffective.
2. Cash Flow Risks: Changes in exchange rates can lead to significant increases in a company's costs. This is because goods and services need to be translated into currencies with more volatile exchange rates. This can lead to cash flow issues and disruption in the day-to-day operations of a business.
3. Balance Sheet Risks: Exchange rate fluctuations may result in imbalances between assets and liabilities. This is because companies have to convert assets and liabilities denominated in foreign currencies into their reporting currency.
4. Political Risks: Exchange rate exposure exposes companies to the risk of declining exchange rates due to political events and currency crises. Companies may also be affected by trade restrictions, tariffs, and other national policies that can lead to increased exchange rate volatility.
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