Risk and Foreign Exchange
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.
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