What is meant by foreign exchange risk? What specific problems does foreign exchange present in an organization? How could an organization that needs Euros in six months protect itself from currency fluctuations?

When a business/investment has cash flow in foreign currency, the risk of value changing due to fluctuation in currency exchange risk is called foreign exchange risk. Foreign exchange risk affects businesses involved in export/import or having operation in foreign country. It also affects investors making investment in foreign country.

Foreign exchange risk has following components:

a) Exchange rate risk

b) Convertibility risk

c) Transfer risk

Fluctuation in foreign exchange rate may be favorable or unfavorable for the company. Since company publishes financial statements in...