Currency business involves various kinds of risks especially when it comes to foreign currency trading. Mostly companies generate their capital either by borrowings from market or by issuing equity. The capital which was generated through above mentioned sources will be invested in overseas assets which always financed in foreign currencies. The company products sold in foreign markets where customers pay in their local currencies.
Significance Of Currency Risk
Even those companies who deal in domestic market face the same currency risk as most of the time raw material imported and they pay the price of raw material in foreign currency. It shows that the risk is an important factor of most of the currency businesses and it play a vital part in success or failure of any business and organization. There are various types of risks few of them are mentioned below.
Transaction Risk
This type of risk occurs when company have to pay cash in foreign currency. Transaction risk occurs during that transactional period when company bought raw material from other countries and pay the cost in foreign currency, after manufacturing the goods it was sold on credit in local market. Mostly company offers 90 or 120 days and during that time the value of that foreign currency changed. The risk involves the period between purchase of raw material and payment received from customers.
Economical Risk
This type of risk also effect directly to the company’s cash flow. This risk involves in future product sales. As the exchange rate changes the prediction of future sales or cash receipt and payment changes which not only affect the profitability of company but also affects the efficiency of the company.
