Where some of the assets of an enterprise are not determined in the currency of its home country, foreign exchange risk or exposure risk arises. Owing to the exchange rate fluctuations, loss arises when domestic currency is exchanged for a foreign currency in relation to business proposed to be undertaken. The occurence of exchange risk can be explained as follows:
An Indian entrepreneur enters into a contract for the purchase of machinery with an American supplier, payment to be made after 3 months. Exchange rate at the time of contract was 40.00/$1. Value of machinery is $50,000. The value of Indian rupee declines to $42.00/$1 after 3 months.
Amount paid to US exporter at the time of contract (US $) = $ 50,000
Amount to be paid to US exporter at spot rate (INR) = $50,000*Rs.40 = Rs. 20,00,000
Amount paid to US exporter at future rate (INR) = $50,000*Rs. 42 = Rs.21,00,000
Therefore, loss suffered = Rs. 21,00,000- 20,00,000 = Rs. 1,00,000
Contributed by:
Veena Vishwanathan
Globsyn Business School
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