Notes On Foreign Exchange Risks

Decent Essays
An owner of a small business that exports all of its products to Europe, and receives 100% of their revenue in Euros needs to be concerned about foreign exchange risks. Foreign exchange risks are defined as an appreciation or depreciation in the exchange rate will lead to a change in the value of assets or liabilities that are denominated in the prearranged currency (Agarwal, 2009). Foreign exchange rates are determined by the market forces for most currencies. Exchange rates fluctuate when because of demand and supply. A currency (Euro) will appreciate when its demand increases and depreciates when its demand falls. As an owner one will need to watch the fluctuation in the currency, and understand there will be unexpected gains and losses.
One will have to have an understanding of the transaction, translation, and economic exposure. Transaction exposure is the risk that the base currency value of the euro will vary while your company continues to export. Translation exposure occurs when foreign currency assets and liabilities are translated into the home currency for the purpose of completing and finalizing the accounts for a period of time. When exporting to Europe it is critical to watch the economy of the countries you are exporting to while limiting economic exposure. Economic exposure is the change in future earning power and cash flow. Changes in exchange rates will affect the company’s position in the market while impeding potential gains (Agarwal, 2009). The owner
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