or negatively) the value of the company's balance sheet.ii)Transaction exposure risk (or business exposure risk)This occurs whenever a company has a commitment to pay or receive a foreign currencyeither immediately or at some future date.Movement in exchange rates will alter the value of the foreign currencies in relation to the“home currency, thereby causing a company either to profit or suffer exchange losses.Transaction exposure risks are more short term in nature and are the result of a company'sbusiness activities.If the company has a medium term contract, it may end up with a commitment to pay over acertain period (eg 3 years), thus this may be a medium term risk.Such risk can be either recurring (e.g. regularly imports Japanese machinery will have to payJapanese Yen on a regular basis) or a one-time exposure in purchasing machinery.For most businesses, it is because of the need to hedge against these risks that they turn tobanks to buy and sell foreign currencies, both for immediate and forward deliveries.iii)Economic Exposure RiskEconomic Exposure risk arises when changes in exchange rates over a period of timeaffect the competitiveness of a company via its pricing and expenditure structure.The sharp appreciation of the Japanese Yen in the mid-1990s caused Japanese exports tobecome more expensive as compared to other countries, thereby affecting the pricingcompetitiveness of the country's exports.
BBMF2073 FOREX AND DERIVATIVESb) Explain the counterparty risk in foreign exchange with appropriate example.Settlement risk involves the non-receipt of the whole amount of the correspondingforeign currency. i.e. one of the counterparties may default on the delivery date.This occurs in all immediate foreign exchange deals (value spot, tomorrow andtoday) and also all forward foreign exchange and swaps transactions.For example,on 9 Sept 2006, XYZ Bank purchased from RST Bank 10million USD/MYR at the rate of 3.5000 for value spot 11 Sept 2006.