A foreign exchange risk arises if the exchange rate of a future foreign exchange transaction is not known for certain. What makes the situation more difficult is that exchange rates fluctuate strongly and the movements are difficult to forecast.
Every business is unique, and foreign exchange risk can arise at differeint points in time from one company to another, based on their currency flows, operations, business model and needs.
There are alternative methods for managing foreign exchange risk:
- Do nothing and buy or sell your currency tin the spot market (FX spot)
- Lock in to fixed rates (FX forwards)
- Use flexible FX product (FX options, FX Swap)
But before selecting one or more methods for managing your business' exchange rate risk, you need to determine your risk appetite, as this will help to determine which methods are the most appropriate for your business.
Or read our guides on currency strategy: