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Foreign Exchange Risk

Financial risk is an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss. (https://en.wikipedia.org/wiki/Financial_risk)

Financial risk has 4 types:

1. Credit risk is divided into concentration risk, counterparty risk and transaction risk.

2. Market risk is divided into interest rate risk, foreign exchange risk, equity price risk, commodity price risk, spread risk, model risk and event risk.

3. Operational risk is divided into internal fraud, external fraud, legal and compliance risk, business disruptions and system failures, damage to physical assets, execution, delivery and process management

4. Strategic risk is divided into insurance risk, pension and obligation risk and business risk

One of the financial risk that is going to be covered is market risk and will be more focusing on foreign exchange risk.

Market risk is the risk of losses in positions arising from movements in market prices.

The types of market risk are:

1. interest rate risk - the risk that interest rates (e.g. Libor, Euribor, etc.) or their implied volatility will change.

2. foreign exchange risk - the risk that foreign exchange rates (e.g. EUR/USD, EUR/GBP, etc.) or their implied volatility will change

3. equity price risk - the risk that stock or stock indices (e.g. Euro Stoxx 50, etc. ) prices or their implied volatility will change.

4. commodity price risk - the risk that commodity prices (e.g. corn, crude oil) or their implied volatility will change.

5. spread risk,

6. model risk - refers to the use of formal econometric techniques to determine the aggregate risk in a financial portfolio.

7. event risk.

Foreign exchange risk (also known as FX risk, exchange rate risk or currency risk)...