Exchange rate risk

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When exchange rate risk refers to the economics resulting from the uncertainty about future exchange rate developments ( exchange rate uncertainty ) emerging risks . The exchange rate risk increases transaction costs for affected market participants and thus hinders the international movement of goods and capital .


One measure of the uncertainty about the exchange rate is exchange rate volatility . In general, the further into the future a planned transaction in a foreign currency increases the uncertainty . Exchange rates can only represent a financial risk for exporters , importers , creditors , debtors , speculators or arbitrageurs if they are subject to volatility, i.e. if they are constantly changing. In this way, there is a difficult to calculate rate risk that by hedging transactions ( hedging can be turned off).


The currency risk can consist of an exchange rate risk , swap rate risk and settlement risk . The exchange rate risk arises in the case of foreign currency assets if the exchange rate of the foreign currency concerned falls and there is an open foreign exchange position and, conversely, in the case of foreign currency debts , if the exchange rate of the foreign currency concerned rises in the case of open foreign exchange positions. The swap rate risk consists of the risk resulting from closed currency positions in which the due dates of the delivery and purchase obligations do not coincide and an unexpected change in the swap rate occurs. Finally, the fulfillment risk consists of the risk that the counterparties from futures transactions will not meet their obligations and this will result in replacement costs for the renewed hedging of an open currency position caused by the default of one of the contracting parties .

Subdivision of currency risks

Currency risks for entrepreneurs can be divided into:

  • Translation risk: The risk from the translation of accounting items at a later reporting date, for example from the translation of the values ​​of assets , liabilities , sales or profits of a foreign subsidiary when determining the group result. The risk is non-cash and therefore less important than the following items. It also influences yield variables such as E.g. the EBITDA margin is not, as both sales and earnings are affected.
  • Transaction risk : arises from existing receivables or liabilities in foreign currencies which have already been recorded in the accounts and which only become cash effective at a later point in time with a previously unknown exchange rate. Any exchange rate fluctuations have a full impact on earnings and margins.
  • Operational risk : relates to future, expected, but not yet precisely determined and therefore not booked exchange rate risks from business activities. This can affect future incoming payments from sales or outgoing payments from cost items in foreign currencies. In future, the effects will have full impact on earnings and margins if foreign currency outgoing and incoming payments do not offset each other in terms of amount and timing ( natural hedging ).
  • Competitive risk: The long-term strategic risk of not being competitive with a product due to currency fluctuations or a long-term unfavorable currency development.

When investing in foreign currencies, investors are exposed to the risk that not only will their base investment gain or lose value, but that the investment currency will also gain or lose value compared to their own currency. This is comparable to the translation risk, but with the difference that investors regularly close and close out their positions in much shorter periods. This means that this risk becomes cash-effective. As a rule, companies hold equity investments for years and decades, so that translation risks only become cash-effective when funds are transferred between companies ( dividends , capital increase ).


Exchange rate uncertainties harbor both opportunities and risks. On the one hand, they enable market participants to make additional profits, and on the other hand, they endanger their returns if the exchange rate moves in an unfavorable direction. The Nobel Prize in Economics carrier Robert Mundell maintains exchange rate uncertainty principle for dangerous because the stability of the financial markets depends for him on the exchange rate:

"An unstable exchange rate means unstable financial markets, and a stable exchange rate means more stable financial markets."

"An unstable exchange rate means unstable financial markets, and a stable exchange rate means more stable financial markets."

- Robert Mundell

Regardless of the individual's risk attitude, exchange rate uncertainties act as transaction costs for foreign traders and investors and thus as a barrier to trade .


If the conscious entering into open positions ( speculation ) is not acceptable, there are a number of hedging options.

A market player can eliminate exchange rate uncertainties through hedging transactions . Examples of this are options and swaps in the foreign exchange market . In addition, it is also possible to eliminate the uncertainties by hedging transactions, i.e. by hedging future incoming and outgoing foreign exchange payments via the futures market .

Another way of reducing exchange rate uncertainty is to endeavor to have receivables and liabilities incurred in the same currency relations. This means that costs are incurred in the same currency ratio as sales. Control sizes to cost items on the relations of the revenues adapt, are financing through the capital markets in the respective currency area , the adjustment of supply conditions , especially for large commodity positions, and the relocation of production to at positions such as human resources or energy costs for an exchange parity to provide ( Natural hedging ).

The invoicing of transactions in domestic currency also provides a useful hedge against exchange rate fluctuations . However, this only reduces the uncertainty for one of the actors involved, the currency risk to the partner passed .

From government side has been tried several times in the 20th century, the foreign trade by government exchange rate insurance to promote. This is understood to be an inexpensive (often even free) state protection against currency uncertainties. However, government exchange rate insurances are viewed as critical, as they induce the insured to enter into a disproportionately large number of transactions with a high level of uncertainty.

A direct way to avoid exchange rate uncertainty is to form a monetary union ; For example, the European Monetary Union eliminated any exchange rate uncertainty between the countries of the euro zone .

Most economics schools prefer stable exchange rates that minimize or eliminate currency risk. This not only avoids transaction and hedging costs, but also avoids the misallocation of funds due to exchange rate fluctuations. However, fixed exchange rates between paper currencies have historically not prevailed. The best way to maintain stable exchange rates is to peg currencies to precious metals .


  • Robert A. Mundell: Threat to Prosperity. In: Wall Street Journal. Eastern Edition, Volume 235, 2000.

Individual evidence

  1. ^ Georg Walldorf (ed.), Gabler Lexikon Auslands -shops , 2000, p. 579
  2. ^ Robert A. Mundell: Threat to Prosperity . In: Wall Street Journal . tape 235 . Eastern Edition, 2000 (English). Here p. 30.