Question

Describe foreign exchange risk and give an example of this concept

Answer 1

Foreign Exchange Risk refers to the risk associated with the foreign exchange rates that change frequently and can have an adverse effect on the financial transactions denominated in some foreign currency rather than the domestic currency of the company. For example, if United States Company is competing against the products imported from China and if the Chinese yuan per U.S. dollar declines, then the importers enjoy decreased cost advantage over the United States Company. This reflects that the companies not having any direct link to the forex do get affected by the foreign currency change