FOR INDIA'S BEST CA CS CMA VIDEO CLASSES CALL 9980100288 OR VISIT HERE

various types of Foreign Exchange Risk

various types of Foreign Exchange Risk

There are several types of risk that an investor should consider and pay careful attention to. Deciding the potential return while respecting risk is the age-old decision that investors must make.
1. Financial Risk: It is the potential loss or danger due to the uncertainty in movement of foreign exchange rates, interest rates, credit quality, liquidity position, investment price. commodity price, or equity price, as well as the unpredictability of sales price, growth, and financing capabilities. Balance sheet and cash flow hedges as well as derivatives tools mitigate financial risks by reducing uncertainty faced by firms.
2. Business Risk: On a micro scale, business risk involves the variability in earnings due to variation in the cash inflows and outflows of capital investment projects undertaken. This risk, also known as investment risk, may materialize because of forecasting errors made in market acceptance of products, future technological changes, and changes in costs related to projects. The firm can reduce this risk, also referred to as portfolio risk, by seeking out capital projects and merger candidates that have a low or negative correlation with its present operations.
3. Credit or Default Risk: This is the risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations. This type of risk is of particular concern to investors who hold bonds within their portfolio. Government bonds have the least amount of default risk and least amount of returns while corporate bonds tend to have the highest amount of default risk but also the higher interest rates. Bonds with lower chances of default are considered to be “investment grade,” and bonds with higher chances of default are considered to be junk bonds.
4. Country Risk: This refers to the risk that a country would not be able to honour its financial commitments. When a country defaults it can harm the performance of all other financial instruments in that country as well as other countries it has relations with. Country risk applies to stocks, bonds, mutual funds, options and futures that are issued within a particular country. This type of risk is most often seen in emerging markets or counties that have a severe deficit.

various types of Foreign Exchange Risk

5. Interest Rate Risk: It refers to the change in the interest rates. A rise in interest rates during the term of an investor’s debt security hurts the performance of stocks and bonds.
6. Political Risk: This represents the financial risk that a country’s government will suddenly change its policies.
7. Market Risk: It is the day-to-day fluctuations in a stocks price. Also referred to as volatility. Market risk applies mainly to stocks and options. As a whole, stocks tend to perform well during a bull market and poorly during a bear market.
8. Foreign Exchange Risk: When investing in foreign countries one must consider the fact that currency exchange rate can change the price of the asset as well. Foreign exchange risk applies to all financial instruments that are in a currency other than your domestic currency. As an example, if you are a resident of America and invest in some Canadian stock in Canadian dollars, even if the share value appreciates, you may lose money if the Canadian dollar depreciates in relation to the American dollar.

various types of Foreign Exchange Risk

cakart

Click here to download FREE CA CS CMA books.

various types of Foreign Exchange Risk

Leave a comment

Your email address will not be published. Required fields are marked *

//