In a foreign exchange market,
there exist price risk or market risk. Fluctuation in price of currencies due
to several factors to which business is exposed. Which can lead to unforeseen
losses or windfall profit.
The risk management process
consists of the following elements
I. Risk appreciation &
identification
Risk appreciation is the
realization that a risk exists. It is accepted that exchange rates change and in
a volatile way.
Risk identification is however,
not so simple .for example, a business which imports raw materials and sale
finished goods in the domestic market. Certainly, it has currency exposures if
the rupee falls, the cost of raw materials would go up and so will the price of
finished goods which makes it difficult for the business to be competitive.
Thus risk identification is required.
II. Risk measurement
One of the broad measure in the
risk measurement is the net open position (i.e. receipts minus payment ) in
each currency. For
working out the net position,
anticipated imports/exports. As indeed economic exposure can be taken into
account. This is a speculative
exposure and should be limited
according to the management attitude to risk,the vulnerability of the business
to adverse movement, ets.
III. Risk control
Risk control is ensuring that
only affordable risk are taken and ensuring that the risk management parameters
laid down are followed. Actual reports needs to be compared with the prescribed
limits.
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