DEFINITION of 'Transfer Risk'

Transfer risk is the threat that a local currency can't be converted into another nation's currency due to changes in nominal value or specific exchange restrictions. Transfer risk, also known as conversion risk, may arise when a currency is not widely traded and capital controls prevent an investor or business from freely moving currency in or out of a country.

BREAKING DOWN 'Transfer Risk'

Transfer risk rose to the forefront in recent decades as businesses made international trade a large part of their normal operations. This increased the flow of goods and services across borders and helped keep prices low for a variety of goods. There are, however, risks involved in buying goods from a company on the other side of the world.

When a company in the United States buys goods from a company in Japan, the transaction is typically denominated in USD or Japanese Yen. These are frequently traded currencies, so it is relatively easy for the U.S.-based company to convert dollars into yen. Both countries also have well-regulated and stable economies that allow transactions to be conducted without any limitations. The choice of currency in an international transaction often depends on the needs and desires of each business. 

In some cases, however, a business may purchase goods from a company located in a foreign country where it is more difficult to convert the currency. Companies are subject to the laws of the country where they do business. These laws may affect how business is conducted, bank transactions are processed, and goods are delivered.

For example, banking regulations in a country may prevent a business from withdrawing funds in a foreign bank after a sale for several months. While the funds are being held, the value of the foreign currency may decrease relative to the value of currency from the country the business is located in. This could result in the business losing money on the transaction.

Protecting Against Transfer Risk

Transfer risk puts businesses in risky situations but there are certain measures to limit the loss of capital. Some firms keep a reserve of cash, often known as allocated transfer risk reserve, to manage these challenges. It is an allowance a company keeps to protect against country risks and inconvertible currencies. The types of companies that maintain a transfer risk reserve can include large retail multinationals to big banks with exposure in various countries. A banking institution may establish an allocated transfer risk reserve for specified international assets when required by the Board, according to the Federal Deposit Insurance Corporation (FDIC). 

RELATED TERMS
  1. Current Transfers

    Current transfers are current account transaction in which a ...
  2. Limited Convertibility

    Limited convertibility refers to a situation in which government ...
  3. International Currency Converter

    An international currency converter converts the value of one ...
  4. Book Transfer

    A book transfer is the transfer of funds from one deposit account ...
  5. Foreign Exchange Risk

    Foreign exchange risk describes the risk that an investment may ...
  6. National Currency

    A national currency is a legal tender issued by a central bank ...
Related Articles
  1. Personal Finance

    8 Low-Cost Ways To Transfer Money

    If cost is your primary concern, there are several cheap(er) ways to move funds.
  2. Investing

    5 Money Transfer Tips For Foreign Workers

    If you are working in the U.S. as a foreign worker, here are some tips for sending money back home.
  3. Personal Finance

    How to Transfer Credit Card Balances to a New Card

    Before you read that new credit card's zero percent interest balance transfer offer, see our guide to help save money and pay down your existing debt.
  4. Investing

    5 Ways To Invest In Currencies

    As the economies of some countries sputter and former third-world countries are beginning to emerge, currency investing is becoming more intriguing. Learn ways to make money on money with the ...
  5. Trading

    Exploring Non-Dollar Currencies For Forex Trading

    Learn how investments in foreign currencies can diversify your portfolio.
  6. Investing

    The 3 biggest risks faced by international investors

    Investing internationally is a great way to diversify your portfolio, but as an investor you need to know the risks and barriers that are faced in global markets.
  7. Trading

    Top 5 Hardest-Hit Currencies

    The value of a country's currency is dependent on many factors that will cause it to fluctuate, relative to other world currencies.
  8. Trading

    Top 5 Forex Risks Traders Should Consider

    With a long list of risks, losses associated with foreign exchange trading may be greater than initially expected. Here are the top 5 forex risks to avoid.
  9. Trading

    Corporate Currency Risks Explained

    Corporate currency risks include transaction, translation and economic risks.
  10. Insights

    How to Invest In Developing Markets

    Developing markets can be attractive additions to many investor's portfolios, but carry additional risks that must be considered.
RELATED FAQS
  1. What is foreign exchange?

    Foreign exchange is the conversion of a country's currency into another. In a free economy, a country's currency is valued ... Read Answer >>
  2. How does transfer pricing help business?

    Explore several ways that transfer pricing helps businesses. Transfer pricing can often help streamline accounting and business ... Read Answer >>
  3. What are key economic factors that can cause currency depreciation in a country?

    Read about the causes of currency devaluation, and find out how to differentiate between relative and absolute currency devaluation. Read Answer >>
Trading Center