Exporting Your Goods
Insurance Against Foreign Currency Exposure
Since most international business is not conducted in Canadian currency, you will exposed to risks related to changes in the exchange rate of the foreign currency in which you are paid against the Canadian dollar. The following four questions and answers can help you decide how to manage that risk:
What types of risks exist regarding foreign currency exposure?
What is transaction exposure?
What is translation exposure?
What is economic exposure?
What types of risks exist regarding foreign currency exposure?
- Transaction exposure
- Translation exposure
- Economic exposure
What is transaction exposure?
This type of risk relates to the effects of foreign exchange transactions that have been initiated but not yet completed and its impact on cash flow. For example, if you have a receivable in a foreign currency receivable and the currency of that receivable devalues against the Canadian dollar.
What is translation exposure?
This type of risk refers to the effects of foreign exchange fluctuations on financial reporting – i.e., for your taxes and financial statements. If foreign currency accounts are converted into Canadian dollars using inappropriate foreign exchange rates, you may appear to have paper gains or losses.
What is economic exposure?
This type of risk refers to the impact of economic conditions on future cash flow. For example, if the Canadian dollar significantly appreciates against the local currency, then your goods may appear too expensive.