Getting a better handle on currency risk

Recent swings in global currencies have brought exchange-rate risk back to the forefront for companies working with suppliers, production, or customers in different currencies. Although official, or “nominal,” exchange rates tend to draw the most attention, what really matters to companies are changes in real terms—that is, when currency changes are adjusted for differences in inflation. In an ideal world, if prices were to fall as currency values rose, or vice versa, then the purchasing power of companies’ cash flows would be stable, and there would be no real currency risk. That often works itself out over the long term, but not for all currencies and not necessarily in the short term. 

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