B1 - M6: Financial Risk Part 2

Question 1

If the dollar price of the Euro rises, what happens economically?

Answer 1

The Dollar depreciates against the Euro. The Euro can buy more US goods.

Question 2

Freely fluctuating exchange rates are associated with what?

Answer 2

Automatic corrections to a lack of Equilibrium economically.

Question 3

When deciding on Hedging Instruments, what role does the Premium (cost of the hedge) play?

Answer 3

None. The cost to hedge is considered a sunk cost with respect to the DECISION to exercise a hedge option.

Question 4

When accounting the impact of Hedging Instruments, what role does the Premium (cost of the hedge) play?

Answer 4

The cost of a hedge IS CONSIDERED when determining net gain or loss upon exercising the option.

Question 5

What is Transaction Exposure as it relates to Exchange Rate Risk?

Answer 5

Risk of Economic loss due to the settlement of individual transactions resulting from changes in exchange rates.

Question 6

What is Translation Exposure as it relates to Exchange Rate Risk?

Answer 6

Specific to companies operating abroad. Risk of negative impact consolidated financial statements (Assets, Liabilities, Equity, Income) resulting directly from changes in exchange rates.

Question 7

What is Economic Exposure as it relates to Exchange Rate Risk?

Answer 7

Macro Economic view. Risk of Negative Impact to the value of an organization’s Cash Flows and Earnings due to changes in exchange rates between currencies.