Operating or Economic Risk

This third type of risk to which those who dabble in the foreign exchange markets are exposed is an interesting one.

It is something that turns up as a result of the company's position in a competitive sense... what this means in practice is that the value of a company's cash can change due to fluctuations in the foreign exchange rate, regardless of things like their trades are done overseas and whether they are hedged or not.

This can clearly be seen by imagining companies that rely on foreign money coming in - let's say a tourist company. Now if you are a historic castle in Britain, say, and you get all your money through foreign clients, then clearly you have a big issue with the strength of the currency.

If the pound is weak then you are more likely to get more tourists as they are getting to view the castle for comparatively cheaper price for you; if the exchange rate is particularly against them they will be tighter with their money and you will get less visitors as a result.

So it is indeed very interesting to see how this form of economic or operating risk takes place and just how it can affect those actually with nothing to do directly with the foreign exchange markets.

Central Bank Intervention in the Markets
Risk and Foreign Exchange
What is an Efficient Market?
Strong form of Market Efficiency
Weak Market Efficiency

Operating or Economic Risk

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