What does "foreign exchange risk" mean in treasury management?

Foreign exchange risk, also known as currency risk, specifically refers to the potential for financial loss that arises from fluctuations in exchange rates between different currencies. In treasury management, this risk is particularly important for businesses engaged in international trade or investment, as their revenues and costs may be affected by changes in currency values. When a company trades in foreign currency, it faces the challenge that the value of those currencies can rise or fall, impacting the amounts received when converting them back to the home currency.

This notion of fluctuating currency values can significantly affect profit margins, project valuations, and overall financial planning. By identifying and managing this risk, treasury professionals work to minimize the adverse effects that currency movements can have on the organization's financial performance. Thus, recognizing foreign exchange risk is crucial in establishing effective risk management strategies in global finance.