You have been appointed as the Finance Manager of Jaja Ltd and the expectation of the board is for you to provide education and working solution to their foreign exchange losses problem which your predecessor had no clue.
Your first task was to provide basic knowledge to the board on foreign exchange losses.
How will you explain the following?
i) Foreign Exchange Risk (2 marks)
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Foreign exchange risk is the risk of changes in the foreign exchange rate or the value of a currency. The level of change or movement cannot be determined with certainty making any counterparty with exposure in that be exposed to the market volatility or uncertainty.
ii) Transaction Risk (2 marks)
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Transaction exposure refers to the gains or losses made on foreign exchange transactions due to the changes in the exchange rate between the transaction date and the payment or settlement date if the exposure or transaction is unhedged.
iii) Translation Risk (2 marks)
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Translation risk refers to the movement in values either gains or losses of the balance sheet due to the consolidation of the assets and liabilities into a reporting currency from various currencies.
iv) Economic Risk (2 marks)
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Economic exposure refers to the long term changes in the value of a foreign firm due to the unexpected changes in the exchange rate movements.