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Foreign exchange risk refers to the potential for loss or gain due to fluctuations in exchange rates between currencies.

Transaction risk arises from the time difference between entering into a contract and settling it, during which exchange rates can fluctuate.

Translation risk occurs when a company's financial statements in foreign currencies need to be consolidated into the home currency for reporting purposes.

Economic risk, or forecast risk, refers to the risk that a company's market value is influenced by unexpected exchange rate changes.

Forward contracts allow businesses to lock in exchange rates at a future date, protecting against unfavorable currency movements.

Options contracts give the right, but not the obligation, to exchange currency at a pre-determined rate, offering protection with flexibility.

Futures contracts are standardized and traded on exchanges, obliging the holder to exchange funds at a specified rate on an agreed date.

Currency swaps are agreements to exchange principal and interest payments in one currency for another over a set period of time.

Natural hedging involves balancing receivables and payables in the same foreign currency or in structuring operations to reduce currency exposure.

To manage FX risk, firms need to assess the degree of risk they face, incorporating external and internal factors that influence exposure.

Exchange rate fluctuations can impact import and export prices, affecting competitiveness, margins, and overall profitability.

FX risk can affect the value and returns on foreign investments due to changes in the value of the investment's currency relative to the investor's home currency.

Certain economic indicators, like inflation rates, interest rates, and GDP, can significantly influence exchange rates between currencies.

Companies must manage the impact of FX risk on reported earnings, equity, and cash flow, ensuring compliance with relevant accounting standards.

Diversifying across multiple currencies can spread the risk and reduce the impact of the movement in any single currency.

Developing a formalized FX risk management policy helps in creating a structured approach to identify, measure, and manage currency exposure.

Advanced software and analytical tools help in monitoring exchange rates, performing risk assessments, and executing hedge transactions.