FX Glossary

There are commonly three types of currency risk: 1) transaction risk; 2) consolidation risk and 3) economic risk. 

1. The transaction risk is linked to unexpected losses that may occur during the conversion of a currency, typically during commercial transactions (via import/export), financial transactions (e.g. loans) or dividend streams denominated in foreign currency. To assess this risk, the company’s overall foreign exchange position must be calculated, which amounts to calculating the difference between its receivables and its payables, by currency. 
2. The consolidation risk exists only when a company has subsidiaries abroad. In this case, when consolidating the financial statements, the parent company uses the exchange rate to denominate the accounts of its subsidiaries abroad in its national currency. This operation can lead to variations in profits if the parent company has not adopted an appropriate exchange rate hedge.
3. The economic risk refers to uncommitted expenditure and revenues that may be affected by an unexpected change in the exchange rate.