Your potential risk is simulated based on your historical cross border payments and the historical fluctuation of the foreign exchange rates.
This assumes similar payments and fluctuations in the future. However, please note that the historical movements of foreign exchange rates do not predict future development. Your current and future currency risk depends on your future foreign currency payments, how you manage your risk and the future development of foreign exchange rates.
The simulation is done by multiplying your historical exposed foreign currency payments with the historical fluctuation of the specific currency pair. That is:
Potential risk [currency] = Historical foreign exchange payments [currency] x historical fluctuation of the foreign exchange rates [%]
Let's look at an example to clarify this:
- A company is trading EUR/USD.
- The netted USD payments were worth 500,000 EUR during the last 12 months.
- The historical fluctuation of the EUR/USD rate was 10% over the same period.
- Thus the potential risk is: 50,000 EUR