let's talk about the types of currency risks exposures

"The World is Flat: A Brief History of the Twenty-first Century" a book, Thomas Friedman pointed out that global economic integration led to the so-called (A level playing field). Due to the rise of the Internet and the popularity boost by software development and innovation, the unbelievable rate of rise of capital markets including China and India, can easily achieve their own social division of labour via internet. Also, emerging countries can rival with the developed countries, which a new round of globalization that everyone can erase all national boundaries and made ​​the world flat, wow, what’s an amazing world.  

The group of global economic integration has accelerated the transformation of enterprise management defines globalization as “the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, free international capital flows, and more rapid and widespread diffusion of technology”. In order of drive forward the whole globalized economic system dominated by supranational corporate trade and banking institutions that are not accountable to democratic processes or national governments. Nowadays, domestic economic growth is not adequate fulfil shareholder anticipation. Thus, global bargain is much more complicated than domestic trading because of many additional factors, for instance, business tax, trade tariffs, embargo and especially exchange rate and so on. In regard of first risk source that foreign trading faces and currencies are always unsteadiness in the foreign exchange market, yet meaningful subset of these factors that can vary company profitably as well.

 As analysed by the BBS News and Yahoo Finance last year, it’s not difficult to seek how Japanese exporters has also been hurt by a vigorous rising Japanese yen. Numerous Japanese companies who reported profit warning, the world’s top automaker Toyota, electronics giants Toshiba and Panasonic also quoted the negative impact as well as Honda was reported a loss by poor sales in some mutual market. The top four Japanese Exporters net profit are also affected by overseas sales were hit since the strong yen, which makes products more expensive and lack of competitive to another foreign enterprise. In this case, Honda, the world’s sixth largest auto manufacturer has announced a 41% drop in quarterly profit. In 2011, Honda's global output dropped by a fifth to 2.9 million cars, slipping below 3 million for the first time in eight years.

To explore and critically appreciate these fluctuating exchange rates issues around major international volatile market. Three main risks named transaction exposure, translation exposure and economic exposure applied to explain conduct such trade each other, and the exporters must accept exposure to the risk associated with changes in currency. Increases in global trades in itself outcome policy is only accepting one role: the exposure to the relative risk combined with changes in currency. 

First of all, Transaction exposures is the risk that in the agreed transactions denominated in foreign currency transaction gain or loss that a firm with known future cash flows in a foreign currency that arises from possible changes in the exchange rate. These risks include:
 1. A spot or deferred payment for the import and export of goods or services, payment terms, the shipment of goods and services yet to collection and payment of money or labour costs, the risk of foreign exchange rate changes occur. 

       2. The international credit denominated in foreign currencies, credit and debt is not settled before the exchange rate risk. For example: a project to borrow yen, due for return of yen. The benefits of the project received the U.S. dollar. If the dollar-yen exchange rate plummeted, the project than originally planned to spend a lot of dollars in order into yen against the return of principal and interest, resulting in the loss. 

      3. Forward foreign exchange contracts to be performed, agreed exchange rate and the spot exchange rate changes due to the risks arising.

Secondly, Translation exposures also known as the Conversion Risk refers to the possibility of the amount of change of corporate balance sheets basic upon changes in foreign exchange rates and some foreign exchange capital projects. It is a carrying amount of the losses and gains, has neither actually take delivery of the actual profit and loss nor affect the report of the results of the corporate assets and liabilities. It involved a Risk of adverse effects on a firm's financial statements that may arise from changes in exchange rates.

Finally, Economic exposures occur surrounding the uncertainty in the economy, the economic entities engage in normal economic activity and the possibility of economic loss. It is a natural phenomenon in the development of the market economy. With the development of market economy, continues to expand the scale of production, speed up product updates, changes in social demands intense, economic risks have become producers and so on factors operators must face up to the problem.

Exposed in such global risky market, why domestic corporates will still want to ship their products outside, join in the international stage? The answer is simple: profit maximisation. In common with many corporates not prefer a global trade with tons of countries their even do not know the capital name. Whereas how to bulk up shareholder value maximisation, they have no choose to put company under risks. For now, the best solution is made trading with international bank rather than manage much different currencies in hand which costly to govern huge money pool. Some banks will consider about your company growth opportunities, financing healthy, liquidity and size, etc. to help client set up a hedge portfolio to help them build trading with only one home currency.