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Exchange Rate Risk

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Exchange rate risk is the risk that a position will become less valuable as a result of foreign exchange rate fluctuation. Exchange rate risk is also called currency risk. Companies that do business internationally face considerable exchange rate risk given the time it may take for an order to be filled and the receivable paid. Known and anticipated corporate exchange rate risk can be managed through currency options, forwards, and swaps. An investor is exposed to exchange rate risk, too, when investing abroad. Major banks engage in considerable hedging to manage exchange rate risk through active trading of over the counter currency options. Speculators can profit considerably from a willingness to take on exchange rate risk, such as when George Soros famously bet on the fall of the British pound in 1992, earning a profit of $1billion.



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