Foreign exchange risk

As exchange rate uncertainty (including currency risk) is referred to in economics arising from the uncertainty about future exchange rate developments risks. Exchange rate uncertainties increase the transaction costs for investors, entrepreneurs and consumers, thus hindering the international goods and capital. The uncertainty concerning the exchange rate is greater, the greater the observed exchange rate volatility and the farther the planned expenditure is in the future in a foreign currency.

Subdivision of currency risks

Currency risks for entrepreneurs can be divided into:

• Translation risk: the risk arising from the translation of accounting positions at a later date, such as from the translation of the values ​​of assets, liabilities, revenues or profits of a foreign subsidiary in the determination of net income. The risk has no cash impact and therefore less important than the following items. It also affects margin variables, such as the EBITDA margin not, since both revenues and earnings are affected.

• Transaction risk: results from existing, already accounting purposes covered claims or liabilities denominated in foreign currencies which are not payable until a later date with previously unknown exchange rate. Any fluctuations are fully profit -margin effect.

• Surgical risk: refers to future, anticipated, but in the height can not be precisely fixed and therefore not posted exchange rate risks arising from operating activities. This may relate to future cash receipts from sales or outgoing payments for cost positions in foreign currencies. The effects are fully in future earnings and margins effectively so that this, foreign currency cash outputs and inputs in height and Timeline not compensate ( natural hedging ).

• Competition risk: long -term, strategic risk with a product due to currency fluctuations and a longer-term unfavorable currency development not to be competitive.

Investors are exposed to the risk that wins not only their basic investment in value or lose, but also the investment currency as compared to their own currency increases in value or loses. This is similar to the translation risk, but close, with the difference that investors regularly in much shorter periods of their positions and close out. To ensure that this risk is cash. Companies typically hold investments for years and decades, so translation risks become payable only in the transfer of assets between companies (dividends, capital injection ).

Effects

Exchange rate uncertainties can be considered both as an opportunity as well as risk. On one hand, they allow market participants additional profits, they also jeopardize their return if the exchange rate moves in an unfavorable direction. The Nobel laureate Robert Mundell holds exchange rate uncertainty principle for dangerous: "An unstable exchange rate Means unstable financial markets, and a stable exchange rate Means more stable financial markets " (Eng.: An unstable exchange rate is unstable financial markets, a stable exchange rate in more stable financial markets. ) (Lit.: Mundell, 2000, p 30)

Regardless of the risk attitude of the individual, however, exchange rate uncertainty for foreign traders and investors act as transaction costs and thus an obstacle to trade.

Countermeasures

In addition to the deliberate taking outright positions ( speculation) there are a number of security options:

An individual market actor can avoid exchange rate uncertainties by hedging ( hedging). Examples include options and swaps in the foreign exchange market. In addition, elimination of the uncertainties by hedging transactions is possible - that is, the hedging of future foreign currency cash inputs and outputs on the futures market.

Another way of reducing exchange rate uncertainty is the effort, receivables and liabilities to be incurred in the same currency relations. This requires the costs incurred in the same currency ratio as sales. Control variables to cost items on the relations of the revenues adapt the financing through the capital markets in the respective currency area, the adjustment of supply conditions, particularly with large commodity positions and the relocation of production to provide for items such as personnel or energy costs for a currency parity ( natural hedging ).

A meaningful hedge against exchange rate fluctuations also provides the invoicing of transactions in domestic currency. However, this merely reduces the uncertainty for one of the actors involved, the currency risk is passed on to the partner.

The State authorities has been repeatedly tried in the 20th century to promote foreign trade by government exchange rate policies. This refers to an inexpensive ( often free ) government hedge against currency uncertainty. State insurance exchange rate are not considered to be critical, since they induce the insured to respond disproportionately many afflicted with high uncertainty shops.

A straightforward way to avoid exchange rate uncertainty is the formation of a monetary union; as the European Monetary Union, for example, eliminated any exchange rate uncertainty between the countries of the euro zone.

The most economic schools prefer stable exchange rates, which exclude the Währungsriskio. This leads not only to avoid transaction / hedging costs, but also avoids the misallocation of resources due to price fluctuations. However, fixed exchange rates between paper currencies have not been successful historically. Stable exchange rates would be best maintained by the binding of currencies to precious metals.