What is exchange rate risk?

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Foreign exchange risk is the financial risk associated with fluctuations in exchange rates between currencies, affecting businesses, investors, and individuals in their international transactions. It can impact income, investments, or loan repayments depending on currency movements. A distinction is made between transaction risk, conversion risk, and economic risk. Its management relies on internal mechanisms (invoicing, netting) or external mechanisms (futures contracts, options), with a balance to be struck between cost and protection.

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