Economic risk is a type of foreign exchange risk caused by the effect of unexpected fluctuations in exchange rates.
Risk increases as exchange rate volatility increases and decreases as it falls. Economic risk is the risk for multinational companies that have numerous subsidiaries abroad and conduct many foreign exchange transactions.
While economic risks are a major concern for multinational companies, with the advent of globalization, many businesses may face economic risks.
Economic risk can be mitigated either through operational strategies such as capacity diversification or foreign exchange risk reduction strategies such as currency swaps.