Rensselaer has credit risk because if the swap counterparty defaults on the contract, Rensselaer will not have hedged its dollar cash flows. Rensselaer is also exposed to the type of currency risk referred to as economic risk to the extent that local asset and currency movements are correlated. Economic risk refers to longer term noncontractual exchange rate risk and the amount to hedge is not readily determined. Hoskins states that she does not feel comfortable projecting cash flows from the German factory beyond the next two years. She therefore is uncertain how much to hedge in the future and Rensselaer has economic risk |
