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Factor In Foreign Exchange Risk While Investing UPSC NOTE

 


Foreign exchange risk and how it can affect investments made in international markets?

  • Foreign exchange risk refers to the losses that an international financial transaction may incur due to currency fluctuations. 

  • Also known as currency risk, FX risk and exchange-rate risk.

  • It describes the possibility that an investment’s value may decrease due to changes in the relative value of the involved currencies.

  • Investors may experience jurisdiction risk in the form of foreign exchange risk.

  • Any appreciation/depreciation of the base currency or the depreciation/appreciation of the denominated currency will affect the cash flows emanating from that transaction. 

  • Foreign exchange risk can also affect investors, who trade in international markets, and businesses engaged in the import/export of products or services to multiple countries.

  • The proceeds of a closed trade, whether it is a profit or loss, will be denominated in the foreign currency and will need to be converted back to the investor's base currency. 

  • Fluctuations in the exchange rate could adversely affect this conversion resulting in a lower-than-expected amount.

  • An import/export business exposes itself to foreign exchange risk by having account payables and receivables affected by currency exchange rates. 

  • This risk originates when a contract between two parties specifies exact prices for goods or services, as well as delivery dates. 

  • If a currency’s value fluctuates between when the contract is signed and the delivery date, it could cause a loss for one of the parties.

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Factor In Foreign Exchange Risk While Investing UPSC NOTE
Factor In Foreign Exchange Risk While Investing UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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