Currency risk
The risk of financial loss due to exchange rate fluctuations between the date a contract is concluded and the date of settlement.
Currency risk (or foreign exchange risk) is the risk that an exchange rate movement between two currencies causes a financial loss for a company engaged in international transactions. This risk exists whenever a time gap separates the commercial commitment from financial settlement.
Three types of currency risk are distinguished:
- Transaction risk: impact on future cash flows (invoices in foreign currency). The most direct and frequent.
- Translation risk: accounting impact when consolidating foreign subsidiaries (IFRS/IAS 21).
- Economic risk: long-term competitiveness impact from structural exchange rate movements.
Currency risk exposure is measured by the foreign exchange position: the difference between receivables and payables denominated in the same currency. A long position (more receivables than payables) exposes the company to currency depreciation.
Currency risk management is part of the company's financial policy and must be formalised: hedging thresholds, authorised instruments, time horizons, and regular reporting.