Currency exposure risk is the risk or the possibility of incurring financial losses in the future payments from economic transactions, as a result of deviations of exchange rates from the expected future rates of exchange. Multinational organizations are usually prone to such risks, given the fact that they cannot operate international transactions with a single currency, since they have to use cross rates between various foreign currencies. The currency exposure risk is caused by the difference between the foreign exchange selling rate and the buying rate. In the process of exchange, global companies access foreign currencies from financial institutions at higher rates than they can sell them to the same financial institutions. This exposure is always inherent in every international trade transaction.
Operating and economic exposure
Rejda defines operating risks or economic risk exposures as the collective effects of all the foreign exchange exposure risks, resulting from all business transactions and economic activities related to the transactions documented in the end year financial statements, such as balance sheets, income statements, and cash flow statements. The transactional items include all foreign exchange transactions such as sales, purchases, operational expenses, and foreign currency investments.
Translation exposure risk is the risk of financial losses, as a result of variations or changes in the values of items in the consolidated balance sheet or fixed assets and long-term liabilities, which were initially valued in foreign currencies. According to Trieschmann, Hoyt & Sommer, the translation of assets and liabilities takes place at the end of every financial year, using the rate when the balance sheets are prepared.