RESEARCH METHODOLOGY FOR CURRENCY RISK OF ENTERPRISES
Abstract
This article conducts a comprehensive study of the currency risks of companies. It integrates two methodological approaches: the research organization in economics and business by Easterby-Smith et al. and the conceptual modelling method as the Unified Foundational Ontology (UFO) by Guizzardi. The author systematizes three approaches to interpreting currency risks – statistical, mathematical, and financial-economic. Unlike the other two, the financial-economic approach focuses on how unpredictable exchange rate volatility affects economic agents' activities, particularly their cash flows or market value. Additionally, the author emphasizes distinguishing between currency risk as an actual, realized threat (ex-post) and exposure to potential risk (ex-ante). Despite its constant presence, the latter may not happen and cause losses. Based on the deep comparative analysis of these categories, the author refines the definition of currency risk as the actual change in stock returns or the deviation of market value from fair (former) value due to unpredictable exchange rate volatility. Correctly identifying the risk directly influences the recognition of its type – whether translational, transactional, economic; recurrent, non-recurrent; linear, non-linear; symmetric, asymmetric; implicit, or explicit. It will determine the appropriate quantitative measurement method. In the case of economic exposure analysis, the author argues that classical risk assessment tools such as VaR, open currency positions, and standard deviation are inadequate as they do not reflect the impact of unpredictable exchange rate fluctuations on business activities. Instead, to measure economic exposures, the most popular approach is to apply asset pricing models, primarily the Capital Asset Pricing Model (CAPM).
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