Identification of Foreign Exchange Exposures

Foreign exchange exposures arise from many different activities. A traveller going to visit another country has the risk that if that country's currency appreciates against their own their trip will be more expensive.An exporter who sells its product in foreign currency has the risk that if the value of that foreign currency falls then the revenues in the exporter's home currency will be lower.An importer who buys goods priced in foreign currency has the risk that the foreign currency will appreciate thereby making the local currency cost greater than expected.Fund Managers and companies who own foreign assets are exposed to falls in the currencies where they own the assets. This is because if they were to sell (repatriate) those assets their exchange rate would have a negative effect on the home currency value.Other foreign exchange exposures are less obvious and relate to the exporting and importing in ones local currency but where the negotiated price is being effected by exchange rate movements.Generally the aim of foreign exchange risk management is to stabilise the cash flows and reduce uncertainty from financial forecasts. Fortunately there are a range of hedging instruments that achieve exactly that.