What is exchange rate risk?

Exchange rate risk refers to the risk involved in foreign currency transactions.
This is also known as currency fluctuation risk or foreign exchange risk.

What is exchange risk?

Exchange risk refers to the risk that arises from fluctuations in exchange rates.
The risk here is uncertainty.

The exchange rate between the yen and foreign currencies changes daily depending on each country's economic policies, economic conditions, and global situations.

Types of exchange risk

There are three types of currency risk:

1) Conversion risk

When assets and liabilities denominated in foreign currencies are recorded on financial statements, fluctuations in exchange rates will result in accounting profits and losses. Therefore, until a transaction is made, it is considered exchange risk that does not affect cash flow.

② Transaction risk

This is the risk that profits may change depending on the exchange rate at the time of settlement of a foreign currency transaction.
This will have an impact on your actual cash flow.

3) Economic risks

This refers to the risk that fluctuations in exchange rates will have an impact on the economy, affecting the very structure of a company, including its profitability and competitiveness.

Impact of the strong yen

A strong yen means that the yen is more valuable than other currencies.
A strong yen has both advantages and disadvantages.

merit

The benefit of a strong yen is that overseas products and services can be purchased cheaper.
In particular, companies that primarily import can provide overseas products and services to the Japanese market at low cost.

Disadvantages

On the other hand, for export companies, there is a disadvantage in that profits decrease when converting foreign currency into yen compared to when the yen was weak. If they try to make up for this difference by raising sales prices, they run the risk of losing sales overseas.

Impact of the weak yen

A weak yen means that the value of the yen is lower compared to other currencies. A weak yen has both advantages and disadvantages.

merit

For export companies, when converting foreign currency into yen, profits increase compared to when the yen was strong, and they can lower prices overseas by the amount of profits they have already made, thereby increasing sales of their products and services.

Disadvantages

The depreciation of the yen has the disadvantage of making foreign products and services more expensive for importing companies and consumers. For importing companies, it reduces their competitiveness in the Japanese market, and for consumers, it reduces their purchasing power as the prices of foreign products rise.

Countermeasures against exchange rate risk

In today's society, where companies are dramatically increasing their international transactions, exchange rate risk is unavoidable when trading between foreign currencies.
Measures are necessary to address the risk of exchange rate fluctuations during the collection period of accounts receivable, as well as the exchange rate risk for companies that hold a large amount of foreign currency.

Forward exchange contracts

A foreign exchange contract is a reservation made with a bank to buy or sell a specific currency at a specific price on a specific date.
By entering into a foreign exchange contract, you can avoid the risk of fluctuations on the day of the transaction.

Foreign exchange contracts require prior approval from the bank, so you should consult with your bank before making the transaction.

Currency Swaps

A currency swap is a transaction in which interest rates and principal are exchanged between two foreign currencies.
For example, a Japanese company can issue yen-denominated corporate bonds and exchange them for dollar interest rates from a U.S. company through a currency swap, thereby receiving dollar interest and paying yen interest.

Currency Options

A currency option is a transaction in which a specific currency can be bought or sold at a pre-determined exchange rate for a pre-determined period or date. There are call options, which are options to buy foreign currency, and put options, which are options to sell foreign currency.

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This time, we addressed the following: "What are the exchange rate risks when expanding overseas and importing and exporting? What is the impact of a strong or weak yen?"

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