Exchange rate risk

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There are 3 types of risk exposed in foreign exchange transactions:

  1. Economic exposure - the loss of sales that a domestic exporter might experience if the domestic currency appreciates relative to a foreign currency
  2. Translation exposure - the decline in the value of assets that are denominated in foreign currencies when those foreign currencies depreciate
  3. Transaction export - the risk that exchange rate fluctuations will make contracted future cash flows from foreign trade partners decrease in domestic currency value or make planned purchases of foreign goods more expensive

Mnemonic[edit]

ETT

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