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Risk and Foreign Exchange

So there are a number of risks that an investor has when it comes to currency exposure. These can be summarised in a few different ways, and of course they all come from the phenomenon that is the movement of exchange rates, which are always bubbling away and changing with currencies that float relative to each other.

These three main types of risk in the foreign exchange market tend to be broken down under the following categories.

First there is transaction risk.

Second there is translation risk.

Third, there is the economic risk also known as the operating risk.

The first of these refers to the risk that the value of any foreign currency receipts / payments will vary due to the fluctuations in the exchange rate, therefore affecting the revenues.

That's the most intuitive and understandable of the risks.

Translation risk looks at the idea that the value of foreign assets will vary due to exchange rates with a knock on impact in the investment performance. This can distort the performance of the company seemingly.

Operating or Economic Risk
The Efficient Markets Hypothesis
Weak Market Efficiency
Strong form of Market Efficiency
Semi-Strong Market Efficiency

Risk and Foreign Exchange

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