Chapter 14: Foreign currency risk

Question 1

Currency futures

Answer 1

: A contract to purchase or sell a standard quantity of a currency by an agreed future date at a specified exchange rate.

Question 2

Currency options:

Answer 2

A right of an option holder to buy (call) or sell (put) a quantity of one currency in exchange for another, at a specific exchange rate on or before a future expiry date.

Question 3

Economic risk:

Answer 3

Due to long-term movements in the exchange rate that damage the value of a company because the net present value of the business’s cash flows is diminished by expected exchange rate trends.

Question 4

Exchange rate:

Answer 4

The rate at which one country’s currency can be traded in exchange for another country’s currency.

Question 5

Forward contract:

Answer 5

A contract with a bank (sometimes called an over the counter or OTC contract) fixing the exchange rate on a specific amount of foreign currency (FX) receivable or payable at a future date at an exchange rate agreed now.

Question 6

Netting:

Answer 6

A process in which credit balances are netted off against debit balances so that only the reduced net amounts remain due to be paid by actual currency flows.

Question 7

Spot rate:

Answer 7

The exchange rate currently offered on a currency for immediate delivery.

Question 8

Swap

Answer 8

: A formal agreement whereby two organisations contractually agree to exchange payments on different terms, eg in different currencies.

Question 9

Transaction risk:

Answer 9

The risk that a transaction in a foreign currency is recorded at one rate and then settled at a different rate because of a change in the exchange rate.

Question 10

Translation risk:

Answer 10

e risk that the domestic currency value of foreign currency assets falls, or the value of foreign currency liabilities rises.