Types of financial risk - part 2

In this lesson

1. 0:00 Introduction to currency risks
2. 0:14 Transaction risk explained
3. 0:46 Economic risk and management
4. 2:18 Translation risk and consolidation
5. 3:27 Sandra Ko case study analysis

About this lesson

Understanding these distinctions is essential for the FM and AFM papers, where you'll need to identify which risks apply in different scenarios and recommend appropriate management strategies. Transaction risk is the short-term exposure that arises when you agree a price with an overseas customer or supplier but settle the bill later—the exchange rate movement between these dates changes what you actually pay or receive. Economic risk is longer-term and affects companies that regularly import or export; a strengthening home currency helps importers but harms exporters, and vice versa. Translation risk is different: it's a non-cash accounting risk that occurs when you consolidate overseas subsidiaries or assets denominated in foreign currencies, causing their reported value to fluctuate with exchange rate movements. The video walks you through practical management techniques for each type. For transaction risk, you'll use hedging strategies. For economic risk, you can match your costs and revenues in the same currency or diversify across countries. For translation risk, you can match foreign currency assets with foreign currency liabilities so gains and losses offset each other. A worked example involving an exporter invoicing in home currency helps you apply these concepts and distinguish which risks actually apply in real situations.

Duration: 7m