Question

Exchange rate volatility affects not just multinationals and large corporations, but small and medium-sized enterprises as well, even those who only operate in their home country. While understanding and managing exchange rate risk is a subject of obvious importance to business owners, investors should be familiar with it as well because of the huge impact it can have. What types of risks are companies exposed to?

Answer 1

The companies are exposed to the following types of risk:

1. Exchange rate risk: Exchange rate risk is the depreciation or appreciation of a currency which will result in additional liability to the party which has to pay.

2. Interest rate risk: Interest rate risk affects the currency risk due to changes in interest in the home or foreign country. The currency may be overvalued or undervalued due to interest rate differences.

3. Economic risks: Global economic events have an impact on the exchange rate risk such as tariffs, taxes and government policies.

4. Inflation risk: The increase in general inflation also affects the currency translation.