Risk

In this lesson

1. 0:00 Lesson 23: Managing Forex Risk
2. 0:40 Understanding Exchange Rates and Spreads
3. 3:01 Currency Risk: Causes and Impacts
4. 4:32 Three Types of Currency Risk Explained
5. 5:00 Economic Risk: Long-term Impact
6. 5:52 Translation Risk: Paper vs Cash Flow
7. 6:40 Transaction Risk: Short-term Hedging Focus

About this lesson

The lesson covers both internal hedging methods and external techniques including forwards, money market hedges, futures, currency options, swaps, netting, and matching, giving you the practical tools to protect against adverse exchange rate movements. Understanding exchange rates and how banks quote them is your foundation. You'll see how rates are expressed as spreads with bid and offer prices, and why getting the direction right matters in exam questions. The lesson clarifies the causes of currency risk—the constant fluctuation of exchange rates that can make foreign purchases more expensive or reduce the value of foreign sales—and explains why businesses focus on protecting against downside risk rather than chasing upside gains. Transaction risk is where hedging techniques apply most directly. This short-term risk arises when you record a foreign currency transaction at one rate but settle it weeks or months later at a different rate. By mastering the hedging methods covered here, you'll be able to calculate how to protect your company's cash flows from these adverse movements, a key skill tested in AFM exam questions.

Duration: 7m