Managing risk via the financial markets
in The UK financial system (fifth edition)
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The prices of assets or interest or exchange rates can be subject to unexpected changes that can create losses. This chapter surveys the various methods that are open to traders to manage risk. It discusses in more detail the precise nature of exchange and interest rate risk. Exchange rate risk can arise in a number of different ways: transaction risk for exporters and importers; translation risks, which arises when it is necessary to value overseas assets and liabilities; economic exposure; and hidden exposure. On managing of exchange rate risks, the chapter also discusses how firms may reduce exchange rate exposure by methods internal to the firm such as doing nothing or hedging, and the role of methods external to the firm such as the use of the forward exchange market, temporary foreign currency deposits and loans, forfaiting, options, and back-to-back loans. It also examines strategies to manage interest rate risk.

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