1. Transaction exchange rate risk refers to the possibility that economic entities will suffer losses due to changes in foreign exchange rates in transactions denominated and received in foreign currencies. Trading risks mainly occur in the following situations:
(1) Import and export risks of goods and services.
(2) Risk of capital input and output.
(3) Risks of foreign exchange positions held by foreign exchange banks.
2. Conversion exchange rate risk, also known as accounting risk, refers to the possibility of book losses caused by exchange rate changes when economic entities convert the bookkeeping base currency into bookkeeping base currency in the accounting treatment of balance sheets. The bookkeeping base currency refers to various currencies used in circulation in economic entities and commercial activities. Bookkeeping functional currency refers to the reporting currency used in the preparation of consolidated financial statements, usually the local currency.
3. Economic exchange rate risk, also known as operational risk, refers to a potential loss caused by the unexpected change of exchange rate affecting the production and sales quantity, price and cost of an enterprise, which leads to the decrease of income or cash flow of an enterprise in a certain period in the future.
Main measures to resolve exchange rate risk:
(1) Select the appropriate contract currency. In foreign trade, lending and other economic transactions, the choice of currency as the pricing currency is directly related to whether the transaction subject will bear the exchange rate risk. In order to avoid exchange rate risk, enterprises should try to use their own currency as contract currency, use hard currency when exporting products and capital, and use soft currency when importing and importing capital. At the same time, measures such as hedging clauses are added to the contract.
(2) Hedging through financial markets. The main methods are cash transaction, futures transaction, forward transaction, option transaction, loan investment, interest rate-currency swap, foreign currency bill discount and so on.
(3) The conversion risk of economic entities in the process of balance sheet accounting treatment is generally resolved by implementing balance sheet hedging. This method requires that the insured assets expressed in various functional currencies on the balance sheet are equal to the insured liabilities, so that the converted risk position is zero. Only in this way, exchange rate changes will not bring translation losses.