A guide to managing foreign exchange risk - CPA Australia

A guide to managing foreign exchange risk CPA Australia Ltd (‘CPA Australia’) is one of the world’s largest accounting bodies with more than 122,000 members of the financial, accounting and business profession in 100 countries. For information about CPA Australia, visit our website www.cpaaustralia.com.au First published December 2009 CPA Australia Ltd ACN 008 392 452 385 Bourke Street Melbourne Vic 3000 Australia ISBN 978-1-876874-47-6 Legal notice Copyright CPA Australia Ltd (ABN 64 008 392 452) (“CPA Australia”), 2009. All rights reserved. Save and except for third party content, all content in these materials is owned by or licensed to CPA Australia. All trade marks, service marks and trade names are proprietory to CPA Australia. For permission to reproduce any material,

a request in writing is to be made to the Legal Business Unit, CPA Australia Ltd, 385 Bourke Street, Melbourne, Victoria 3000. CPA Australia has used reasonable care and skill in compiling the content of this material. However, CPA Australia and the editors make no warranty as to the accuracy or completeness of any information in these materials. No part of these materials are intended to be advice, whether legal or professional. Further, as laws change frequently, you are advised to undertake your own research or to seek professional advice to keep abreast of any reforms and developments in the law. To the extent permitted by applicable law, CPA Australia, its employees, agents and consultants exclude all liability for any loss or damage claims and expenses including but not limited to legal costs, indirect special or consequential loss or damage (including but not limited to, negligence) arising out of the information in the materials. Where any law prohibits the exclusion of such liability, CPA Australia limits its liability to the re-supply of the information. 1 Table of contents A guide to managing foreign exchange risk 2 Introduction 2 What is foreign exchange risk? 2 Sources of foreign exchange risk 2 Impact of movements in foreign exchange rates on businesses 3 Effects of a falling domestic exchange rate 3 Effects of a rising domestic exchange rate 3 Methods of measuring foreign exchange risk 4 Register of foreign currency exposures 4 Table of projected foreign currency cashflows 4 Sensitivity analysis 4 Value at risk 4 Methods of managing foreign exchange risk 5 Key foreign exchange management terms 6 2 A guide to managing foreign exchange risk Introduction This guide provides an overview of the issues associated with understanding and managing foreign exchange risk, but users may need to make further enquiries to more fully understand them. What is foreign exchange risk? Foreign exchange risk is the risk that a business’s financial performance or position will be affected by fluctuations in the exchange rates between currencies. The risk is most acute for businesses that deal in more than one currency (for example, they export to another country and the customer pays in its own currency). However, other businesses are indirectly exposed to foreign exchange risk if, for example, their business relies on imported products and services. Foreign exchange risk should be managed where fluctuations in exchange rates impact on the business’s profitability. In...

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