1. Transaction risk: The risk that a transaction in a foreign currency is recorded at one rate and then setteled at a different rate because of a change in the exchange rate

   -USD to RMB1:7 changed to 1:7.5

   -Spot rate:  7- 7.5, for importer and exporter,bank make a profit between spread 7-7.5per USD, a bank buy USD selecting 7, sell USD choose 7.5, A company will always be offered the worse rate in order that the bank generates a profit on the transaction.

   -Forward contracts:A contract with a bank ( sometimes called an over the counter or OTC contract) fixing the exchange rate on a specific amount of foreign currency (FX)receivable or payable at a future date at an exchange rate agreed now. interest rateparity theory determinedby interest rate difference

   
   

   -Money market hedging(short term loan:

   a. Identify the loan repayment required in future

   b. calculate the funds need to borrowed today

   c. Convert this immediately tohome currency at the spot rate,and place this on deposit in the home currency

   d. Include the interest earned on the deposit in the home currency, using the interest rate provided,

   
   

   Receipts:

   a. Receive 2500 pes from export, this is the amount of loan repayment required

   b, Take out loan in pes, this shall be 2500/(1+borrowing rate 0.375%)=2490 pes today,including interest

   c. Now convert2490 pes into the USD today at the spot rate 1.45, deposit it 2490/1.45=1717USD

   d. Deposit 1717 USD Three months, interest 2% will be increasted, 1717*1.02=1751

   
   

   Expense:
   

   a. Deposit 3500 pes from now so that the total including interest will be in three months

   b, This means depositing  3500/(1+deposit rate 1.23%)=3457 pes today,including interest

   c. Now convert 3457 pes into the USD today at the spot rate 7.5509, deposit it 3457/7.5509=457USD

   d. Borrow 457 USD now and will have to repay: 457*1.002=1751 in three month

   Currency future:

   Currency option

   Currency swap

   
   

2. Translation risk: the risk that the domestic currency value of foreign currency assets falls, or the value of foreign currecy liabilities

     Using currency swap

  3. Economic risk: due to long term movements in the exchange rate that domage the value of a company becuase the net present value of the business 's assets is diminished by         expected exchange rate trends

     exchange rate fluctuations

     diversify its international operation