What are currency risks?

Currency risks, or, in other words, the risks of exchange losses, are directly related to the globalization of the banking market, the formation of joint banking institutions and enterprises, as well as the diversification of their activities, representing probable monetary losses that may be associated with fluctuations in the exchange rates. There are several types of them.

Currency risks are structured in a certain way: commercial, broadcast, conversion, as well as the risks of forfeiting. Commercial usually involve the impossibility or unwillingness of the debtor to pay off on the obligations undertaken. Under conversion, it is customary to understand the risks of losses for certain specific operations. They can be divided into transfer risk, economic and transaction risk.

The first is often attributed to differences in accounting for liabilities and assets in foreign currency. If there is a depreciation of the currency in which this asset is expressed, its value also falls. If the size of assets decreases, then the size of the share capital of the bank or firm also decreases. If we consider the issue from an economic standpoint, then the risk of the deal is more important, it considers the impact of changes in the exchange rate on the forthcoming flow of payments, and therefore, on the planned profitability of the bank or firm.

The economic risks for the firm are that the value of its assets and liabilities may change towards a decrease or increase, this is due to fluctuations in the exchange rates.

The risk of transactions is associated with the future uncertainty of the value of the foreign currency transaction in the national currency. Profitability and change of a firm entails a change in its creditworthiness, which is why it is very important for the bank to be aware of what currency transactions are carried out by the client. In the situation of instability of exchange rates, one of the methods of protection against currency risks is the choice of the contract currency, the most acceptable for counterparties. Exporters and creditors prefer to use a relatively more sustainable option. The choice of currency may well affect the efficiency of credit and trade operations.

Currency risks and methods of their regulation

It is worth mentioning that this type is an obligatory part of the company's risks, to which participants in economic relations are exposed. Under the currency risks in this case, one can understand the danger of losses associated with a change in the exchange rates between the conclusion of a contract and the payment made. The basis is the change in the real price of the monetary obligation at a particular 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 chosen the approach to choosing a strategy to protect against these risks. It consists in observing several important points.

To begin with, a decision is made on the need to take special measures to insure risks, after which the share of the foreign trade contract or a foreign currency loan, that is, the open currency position, which will be subsequently insured, is allocated. The method and method of insurance is chosen last. International practice provides for several basic methods of risk insurance: mutual agreement between the parties to the transaction, unilateral arrangement 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. The world practice of insurance fully reflects changes in the monetary system and the global economy as a whole.