What do you understand by Currency Risk? Discuss the important products that are generally used by banks in managing currency risk.

Currency risk, also known as exchange rate risk or foreign exchange (forex) risk, refers to the potential for financial losses due to fluctuations in the exchange rates between currencies. This type of risk is especially significant in strategic management when organizations engage in international trade, make foreign investments, or operate in global markets. Currency risk can affect both revenues and costs, ultimately impacting a firm’s profitability, competitiveness, and strategic positioning. It is particularly critical for multinational corporations (MNCs) and financial institutions whose strategic decisions often hinge on international exposure.

There are three primary types of currency risk. Transaction risk arises from exchange rate movements between the time a transaction is initiated and when it is settled. Translation risk affects financial statements when consolidating the results of foreign subsidiaries into the parent company’s financials. Economic risk refers to the long-term impact of exchange rate movements ____ ____ _____ ________ _____ ________ _________ ___ ________ _______ ____ ______.
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