Currency risks, or in other words, risks of exchange rate losses, are directly associated with the globalization of the banking operations market, the formation of joint banking institutions and enterprises, as well as with the diversification of their activities, representing likely monetary losses that may be associated with fluctuations in exchange rates. There are several types of them.
Currency risks are structured in a certain way: commercial, translation, conversion, as well as forfeiting risks. Commercial usually involve the impossibility or unwillingness of the debtor to pay on their obligations. By conversion, it is customary to understand the risks of losses on specific operations. They can be divided into transfer risk , economic and transaction risk.
The first is often associated with differences in accounting for liabilities and assets in foreign currency. If there is a fall in the exchange rate in which the asset is expressed, then its value also falls. If the value of assets decreases, then the size of the share capital of a bank or firm is also reduced. If you consider the issue from an economic perspective, the risk of the transaction is more important, it considers the impact of changes in the exchange rate on the upcoming payment stream, and therefore on the planned profitability of the bank or company.
Economic risks for the company are that the value of its assets and liabilities may change in the direction of decrease or increase, this is due to fluctuations in exchange rates.
The risk of transactions is associated with future uncertainty in the value of a foreign currency transaction in national currency. Profitability and change of the company entails a change in its creditworthiness, in connection with which it is very important for the bank to be aware of what foreign exchange transactions are carried out by the client. In an environment of instability of exchange rates, one of the methods of protection against currency risks can be considered the choice of the contract currency, the most acceptable for counterparties. It is preferable for exporters and lenders to use the relatively more sustainable option. The choice of currency may well have an effect on the effectiveness of credit and trading operations.
Currency risks and methods for their regulation
It is worth saying that this type is an obligatory part of the company's risks to which participants in economic relations are exposed. In this case, currency risks can be understood as the risk of losses associated with changes in exchange rates between the conclusion of the contract and the payment made. The basis is the change in the real price of a monetary obligation at a specific time. Both parties to the transaction are subject to this.
Due to the fact that the rates of absolutely all currencies are subject to periodic fluctuations, the practice of international currency relations has taken the approach to choosing a strategy for protecting against these risks. It consists in observing several important points.
To begin with, a decision is made on the need for special measures to insure risks, after which a share of the foreign trade contract or a foreign currency loan is allocated, that is, an open foreign exchange position that will be insured in the future. The latter selects the method and method of insurance. International practice provides for several basic methods of risk insurance: mutual agreement between parties to a transaction, unilateral agreement or operations of insurance companies, as well as state and bank guarantees. Currency risks are insured by one of these methods, depending on a number of factors. World insurance practice fully reflects changes in the monetary system and the global economy as a whole.