Long-term changes of exchange rates can be rather essential. In general such changes reflect a difference of rates of inflation of two parties, however and other factors can influence a course. In the countries with a high rate of inflation the currency will be "weak", and its cost will quickly go down. The "firm" currency is associated with strong economy.
The parent company is exposed to transmitting risk if it has a subsidiary abroad. As a result the balance cost of group can be reduced at the adverse movement of a course or is increased - at favorable.
If the company has investments in foreign currency, hedging can be provided due to creation in the same currency of the stream of payments corresponding to the investment income. In the same way, if the company has a debt in foreign currency, hedging can consist in creation in the same currency of the flow of the regular income corresponding to percentage payments for loans. Compliance of inflow and outflow of currency means provides to the company hedging of risk as any changes of cost of currency will equally be reflected both in profits, and in losses. If the sum of the income in currency falls, also the cost of payments respectively will decrease; if expenses on payments increase, also the corresponding sum of the income at the same time will grow.
Transmitting risk. Reduction in the reporting of cost of foreign assets or increase in cost of liabilities in foreign currency that conducts to decrease of net value of the enterprise; reduction in the reporting of profit and an indicator of net income by each stock of the enterprise.
The operational risk is generally connected with trade operations, and also with monetary transactions on financial investment and dividend (percentage) payments. To operational risk it is subject both cash flow, and profit level.
If the company regularly buys or sells goods abroad, it constantly faces risk of reduction of revenue or growth of the expenses connected with adverse changes of exchange rates. Such long-term risk is also called economic.
- Currency futures: a financial instrument is a certain quantity of one currency means intended for sale instead of others. Such futures assume the following trade operations: dollar - DM, dollar - yen, dollar - Swiss franc, dollar - pound sterling, US dollar - Canadian dollar. It is not necessary to confuse currency futures to futures for the deposits of the monetary market expressed in the main currencies (futures monetary.
Impact of economic risk on competitiveness can be illustrated by means of a simple example. Let's assume that in the world market two producers - British and American dominate. However production of both firms is estimated in US dollars.
- Negotiable options are on sale and bought at the option exchange and can be resold or bought up again before use expiration. Negotiable options are in many respects similar to WB options, but they are standardized and can be used only for certain types of currency.
- From the point of view of accounting standards, the swap can be classified as the off-balance tool. It is connected with that usually it does not need to be reflected in balance (as a currency loan) and the profit and loss account (as the sum of subjects to payment or receiving percent.
The currency risk can be hedged (i.e. it is reduced or completely liquidated) by means of creation of the corresponding return cash flow or "freezing" of exchange rate on which any future calculations will be made.
The maximum possible losses for the owner of an option is the size of the award paid to the seller of an option. These losses happen in case the option is not made. The paid award is the risk sum for the owner of an option.
- Futures for share indexes: goods in this case is the portfolio of actions which characterizes an index of stock market (for example, the index of the New York stock exchange or a share index published in the newspaper of "Financial Times".
The majority of swaps if they already started working, continue to be realized before the termination of the agreement. In case at the client of circumstance change in such a way that the swap does not meet its requirements any more, it can close the position with the help