What Is a Transaction Risk?

Transaction Exposure In all the activities of an international enterprise organization, that is, in the course of its business activities, results, and expected operating income, there are foreign exchange risks caused by changes in foreign exchange rates. Transaction Exposure, the risk in the results of operating activities is accounting risk (Accounting Exposure), the risk of expected operating income is economic risk (Economic Exposure).

Transaction risk

Transaction Exposure

Transaction risk refers to

Transaction risk is outstanding

Internal management method

1. Strengthen account management and actively adjust assets and liabilities. To

Management methods of transaction risk can be divided into three categories:

Transaction risk precautions

The precautionary measures that can be selected when signing a contract include choosing the contract currency, adding contract terms, adjusting the price or interest rate.

1) Choose a good contract currency. In the economic transactions related to foreign trade, loans, etc., which currency is used to sign the contract as the currency for valuation and settlement or the currency for valuation and settlement, it is directly related to whether the transaction subject will bear the exchange rate risk. The following basic principles can be followed when selecting the contract currency: First, strive to use the domestic currency as the contract currency. Second, the export and loan capital exports strive for the use of coins, that is, currencies whose exchange rates have appreciated in the foreign exchange market.

2) Add currency protection clauses to the contract. Currency preservation refers to selecting a currency with a stable value that is inconsistent with the contract currency. The contract amount is converted into the selected currency to represent the settlement and settlement in the contract currency based on the amount expressed in the selected currency. At present, the currency preservation clauses used by various countries are mainly "a basket" of currency preservation clauses, which is to select multiple currency pairs to preserve the contract currency. That is, when signing a contract, determine the exchange rate between the selected currencies and the contract currency, It also stipulates the weight of each selected currency. If the exchange rate changes, the settlement and payment of the contract currency amount shall be adjusted accordingly according to the current exchange rate fluctuation and the weight of each selected currency at the time of settlement or settlement.

3) Adjust prices or interest rates. In a transaction, it is impossible for both parties to obtain the contract currency that is already favorable. When one party has to accept the currency that is not favorable to it as the contract currency, they can strive to make appropriate adjustments to the price or interest rate in the negotiation: For example, it is required to appropriately increase the export price settled in soft currency, or the loan interest rate settled in soft currency; to appropriately reduce the import price settled in coin value, or the borrowing rate settled in coin value.

Trading risk financial market operations

After the transaction contract is signed, foreign-related economic entities can use the foreign exchange market and the currency market to eliminate foreign exchange risks. The main methods are: spot exchange transactions, futures transactions, futures transactions, options transactions, borrowing and investment, borrowing-spot exchange transactions-investment, discounting of foreign currency bills, interest rates and currency swaps.

1) Cash transactions. Here mainly refers to the use of spot transactions by foreign exchange banks in the foreign exchange market to carry out balanced foreign exchange trading on their daily foreign exchange positions.

2) Borrowing and investment. It refers to the purpose of eliminating foreign exchange risks by creating debts or claims of the same currency, same amount and same term as future foreign exchange income or expenditure.

3) Foreign currency bills are discounted. This method is not only beneficial for accelerating the capital turnover of exporters, but also for the purpose of eliminating foreign exchange risks. In the case where the exporter provides the financial exchange to the importer and owns the forward foreign exchange bills, the exporter can take the forward foreign exchange bills to the bank for discounting, obtain the foreign exchange in advance, and sell it to obtain the local currency cash.

Other methods of managing transaction risk

In addition to the method of signing a contract mentioned above and the method of using financial operations, there are some methods, mainly: early or late, matching, insurance.

1) Receive or pay foreign exchange in advance or after. It means that the foreign-related economic entity advances or settles the settlement or settlement date of foreign exchange receipts and payments based on the forecast of the exchange rate of the denominated currency in order to prevent foreign exchange risks or obtain gains from exchange rate changes.

2) Pairing. It means that when a foreign transaction occurs or after a transaction, another transaction is performed that is exactly the same as the transaction in terms of currency, amount, and payment date, but the funds flow to the opposite transaction, which makes the two exchanges face exchange rates. A practice where the effects of change cancel each other out.

3) Insurance. Refers to foreign entities that insure insurance against changes in exchange rates with relevant insurance companies. Once losses are incurred due to changes in exchange rates, the insurance companies will give reasonable compensation. Exchange rate risk insurance is generally borne by the state.