Foreign Exchange (FX) risk management is driven by the organization’s FX objectives, policy and strategy and is enabled by the implementation of a good FX risk management process.
In order to implement a good FX risk management process organizations can apply the Zanders risk management framework starting with identification of different kinds of FX exposures, as follows:
Transaction exposure: the risk of value changes of a transaction executed in foreign currency measured in the functional currency as a result of foreign exchange fluctuations;
Translation exposure: which arises when an organization has ‘subsidiaries’ with a functional currency other than the reporting currency of the main organization. Translation exposures are often split into profit translation exposures and (net) asset translation exposures.
The FX objectives are defined to facilitate proper management of the impact of FX movements on the organization’s mission and individual projects being implemented. Expected cash flows can deviate significantly when calculated according to the functional currency of the organization over time due to FX volatility. The decision on the level of acceptable risk needs to be embedded in the FX objectives. Leading applicable objectives to manage FX exposures at international organizations are:
Protecting budget enabling implementation of mission objectives and projects.
Donation value maintenance (& maximization) by active FX management.
Protect cash flow volatility and
Protect assets and liabilities.
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