Understanding types of market risk

Foreign exchange risk is your exposure to fluctuating exchange rates. Foreign exchange markets are volatile and are constantly moving. These movements can have implications for any business that has receipts and/or payments in a foreign currency. On conversion, these receipts/payments can change in value from one day to the next, depending on the rate at which they are exchanged.

Interest rate risk refers to your exposure to fluctuating interest rates. Interest payments can be a major cost for many businesses. If an interest rate of 5 per cent moves up just 0.5 per cent it will result in a 10 per cent increase in interest cost. This is a significant direct cost that may impact cash flow, profitability and business strategy as cash that may have been reserved to pursue other opportunities is absorbed by the interest rate change.

Commodity risk refers to your exposure to either fluctuating movements in commodity prices or uncertainty surrounding expected commodity production, affecting both producers and consumers.

Commodity prices can be volatile, which can expose your business to unfavourable prices when it's time to buy or sell in the market place. Ignoring commodity risk can impact your business cash flow, profitability and future planning.

There’s a range of issues to be managed associated with both domestic and international trade including: 

• risk of trading partners becoming insolvent, defaulting on payment, committing fraud or being unwilling to accept goods
• uncertainty of dealing with new suppliers or buyers
• operating in foreign jurisdictions 
• control over shipment and delivery schedules
• receiving the goods of the quality and quantity ordered

We can help you manage or minimise the most common trade-related risks for your business.