First, foreign exchange transactions on behalf of customers or on their own, including foreign exchange spot transactions, foreign exchange forwards, futures, options and swaps and other financial contracts;
Second, holding non-trading foreign currency assets or liabilities, such as foreign currency deposits and loans, issuing foreign currency bonds, overseas investment, etc.
These activities need to be traded or settled in foreign currency, and they also need to be accounted for in terms of costs and benefits. If the exchange rate changes unfavorably, exchange rate risk will occur.
Accounting risk: also known as conversion risk or conversion risk, it arises from the risk of book loss caused by unfavorable exchange rate fluctuations when financial institutions convert the bookkeeping base currency (foreign currency used in specific business) into bookkeeping base currency (local currency) in accounting treatment of financial reports.
Transaction risk: refers to the risk that financial institutions suffer losses due to exchange rate fluctuations in planned, ongoing or completed foreign currency-denominated business transactions, which is a real risk.
Economic risk: refers to the risk that the profitability and cash flow of financial institutions will be adversely changed in a certain period of time due to unexpected exchange rate fluctuations, which is a potential risk.