Currency exchange risk is the risk that is associated with the value of a person’s assets when valued in another currency. The exchange rates of one currency to another is subject to change and, therefore, can be very unstable. It is the sporadic change between the currencies that results in the currency exchange risks. If the value of the coin 0f a person’s goods depreciates, then it will lead to reduced value of the assets or goods held when measured against the other currency before the devaluation (Levi & Maurice, 2005).
The risk also exists when a subsidiary of a firm keeps its financial statements in dissimilar money from that of the mother entity (Levi & Maurice, 2005).
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For any business that engages in export or importation, the risk associated with the currency exchange rates is inevitable. However, it is the role of the management to ensure that they put in place mechanisms that can efficiently predict and counter the risks that come with such trading.
Bartram, Söhnke M.; Bodnar, & Gordon M. (June 2012). “Crossing the Lines: The Relation
between Exchange Rate Exposure and Stock Returns in Emerging and Developed
Markets”. Journal of International Money and Finance 31 (4): 766–