Chapter 10

Question 1

FOREIGN CURRENCY RISK (T,T,E)

Transaction risk

What if the affect of transaction risk?

Answer 1

• risk of adverse exchange rate movements
• normal international trading transactions
• arises when the prices of imports or exports are fixed in foreign currency term

1. Affect cash flows
2. Short-term
3. Needs to be hedged

Question 2

FOREIGN CURRENCY RISK (T,T,E)

Translation risk

Answer 2

• risk that the organisation will make exchange losses
• when acc resulkts of its foreign branches or subsidiaries
• eg: restating the book value of a foreign subsidiary’s assets at the exchange rate at the BS date

1. Book value
2. No need to be hedged
3. May affect investor perception

Question 2

FOREIGN CURRENCY RISK (T,T,E)

Economic risk

Answer 2

• refer to the effect of exchange rate movements on the international competitiveness of a company
• economic exposure can be difficult to avoid, although diversification of the supplier and customer base across different countries

1. Affects cash flows
2. Long-term
3. Difficult to hedge