exchange-rate risk by the amount exchange rates deviate, on average, from the mean exchange rate in a probabilistic distribution. A higher standard deviation would signal a greater currency risk. Because of its uniform treatment of deviations and for the automatically squaring of deviation values, economists have criticized the accuracy of standard deviation as a risk indicator. Alternatives such as average absolute deviation and semivariance have been advanced for measuring financial risk. Value at risk Practitioners have advanced, and regulators have accepted, a financial risk management technique called value at risk (VaR), which examines the tail end of a distribution of returns for changes in exchange rates, to highlight the outcomes with the worst returns. Banks in Europe have been authorized by the Bank for International Settlements to employ VaR models of their own design in establishing capital requirements for given levels of market risk. Using the VaR model helps risk managers determine the amount that could be lost on an investment portfolio over a certain period of time with a given probability of changes in exchange rates. Managing risk Transaction hedging Firms with exposure to foreign-exchange risk may use a number of hedging strategies to reduce that risk. Transaction exposure can be reduced either with the use of money markets, foreign exchange derivatives—such as forward contracts, options, futures contracts, and swaps—or with operational techniques such as currency invoicing, leading and lagging of receipts and payments, and exposure netting. Each hedging strategy comes with its own benefits that may make it more suitable than another, based on the nature of the business and risks it may encounter. Forward and futures contracts serve similar purposes: they both allow transactions that take place in the future—for a specified price at a specified rate—that offset otherwise adverse exchange fluctuations. Forward contracts are more flexible, to an extent, because they can be customized to specific transactions, whereas futures come in standard amounts and are based on certain commodities or assets, such as other currencies. Because futures are only available for certain currencies and time periods, they cannot entirely mitigate risk, because there is always the chance that exchange rates will move in your favor. However, the standardization of futures can be a part of what makes them attractive to some: they are well-regulated and are traded only on exchanges. Two popular and inexpensive methods companies can use to minimize potential losses is hedging with options