What type of exposure relates to exposure to potential financial loss as a result of trading in another currency?

Question

Thumper

Business

6 September, 05:23

What type of exposure relates to exposure to potential financial loss as a result of trading in another currency?

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Answers (1)

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Margaret Larson · Answer 1

The correct answer is foreign exchange risk.

Explanation:

Currency risk is the positive or negative difference that arises from changes in the exchange rate over time. A company that carries out operations in another currency is exposed to exchange rate movements, therefore it must seek to compensate them strategically.

Whenever a company carries out a transaction in foreign currency, whether it is for the importation of inputs or products, or the export of goods, with a waiting period between collection and payment, there is a risk of loss or gain that may affect to your finances and your profitability.

As the exchange market is volatile, a company that does not anticipate changes in the exchange rate may run the risk of incurring losses that affect its financial planning and cash flows.

Therefore, it is advisable to be prudent in your purchases of raw materials or finished products and when contracting financing in other denominations.