FINANCIAL ARTICLES

Price dynamics

The term inflation refers to a general increase of prices of goods and services over a sustained period of time. Conversely, we talk about deflation in case of falling prices.

Inflation, by far the most common situation, occurs when demand for goods tends to outstrip supply, or when more money is introduced in the economy (by printing it, by positive balance in the import/export currency flows, or other more complex market and monetary conditions).

Part 1: Transaction Risk Of the various exposures to forex risk the transaction exposure is the simplest one to understand and manage. For instance, let’s suppose we are a manufacturing company in the eurozone and we order a new machine from US in US dollars. If we pay the machine when it will arrive, say in 6 months, we will pay the amount of euros equivalent to the price of the machine, price established at the moment of buying it, i.e., 6 months earlier. The uncertainty of the amount of equivalent euros is called forex transaction risk. As a consequence, when we make such transactions we are exposed to such risk. By risk we mean its financial definition, of course, which implies the fluctuation potential or uncertainty of the amount or value. In engineering or day-to-day terms we refer at risk as the possibility of an accident or failure.

How do we manage forex transaction...

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