Saint-Petersburg state polytechnic University

Department «World and Regional Economy»

Essay

theme: «Exchange risk management»

Performed:

Student

gr.63708/11

Osipova D.

(signature)

Checked:

Dr.,Prof. Kozlov A.V.

(signature)

Saint-Petersburg

2013

Contents

Y

Contents 2

Introduction 3

The types of foreign exchange risk 4

Risk and exchange operations 6

Exchange risk management 9

12

Conclusion 13

Bibliography 14

Introduction

Trade and payments across national borders require that one of the parties to the transaction contract to pay or receive funds in a foreign currency. At some stage, one party must convert domestic money into foreign money. Moreover, knowledgeable investors based in each country are aware of the opportunities of buying assets or selling debts denominated in foreign cur­rencies when the anticipated returns are higher abroad or when the interest costs are lower. These investors also must use the foreign exchange market whenever they invest or borrow abroad.

I’d like to add that the foreign exchange market is the largest market in the world in terms of the volume of transactions. That the volume of foreign exchange trading is many times larger than the volume of international trade and investment reflects that a distinction should be made between transactions that involve only banks and those that involve banks, individuals, and firms involved in international trade and investment.

As the international financial system has moved increasingly toward freely floating exchange rates, currency prices have become significantly more volatile. The risks of buying and selling dollars and other currencies have increased markedly in recent years. Moreover, fluctuations in the prices of foreign currencies affect domestic economic conditions, international investment, and the success or failure of government economic policies. Governments, businesses, and individuals involved in international affairs find it is more important today than ever before to understand how foreign currencies are traded and what affects their relative values.

So, the general aim of this term paper is research exchange risk management.

The following tasks are to be solved in this paper:

• learning the types of foreign exchange risk;

• identify risk and exchange operations;

• study the main points of exchange risk management.

The types of foreign exchange risk

Foreign currency exchange risks are an important factor for anyone trading in international currencies. Importers and exporters can be greatly affected by fluctuations in foreign currency from one day to the next.

Businesses without commercial contracts expressed in domestic currency (or fixed by an agreed rate of exchange) are fully exposed to exchange risk. Exchange risk may arise because of exchange rate movements in the period from the original commercial contract to the time of settlement of the domestic equivalent of the foreign currency amount.¹

Exchange risk is a part of commercial risk, this risk usually affects businesses that export and/or import, but it can also affect investors making international investments. For example, if money must be converted to another currency to make a certain investment, then any changes in the currency exchange rate will cause that investment's value to either decrease or increase when the investment is sold and converted back into the original currency.

There are different types of foreign exchange risk. Some of them are submitted below: