Foreign Currency Risk Flashcards
What is exchange rate?
Rate at which one country’s currency can be traded in exchange for another country’s currency
What is transaction risk?
Risk a transaction in a foreing currency is recorded at one rate and settled at different rate because of change in exchange rate
Examples of transaction risk?
Company exports and imports from foreign currencies
Making interest payments on a foreign currency loan
Exporters of foreign in a rising domestic
Exporters lose if domestic is strengthen as foreign is weaker
Importers of foreign in decreasing domestic
Importers lose if foreign is weak because domestic is strong
What is spot rate?
Exchange rate currently offered on a currency for immediate delivery
What do export sales create?
Revenue in a foreign currency
When an export receives pesos?
Sell foreign to buy domestic
What does an importer do?
Sell domestic and buy the foreign
What does a spread show?
The different rates at which a bank will transact with an exporter and an importer
What does a bank do at lower rate of spread?
A bank buys domestic at this rate
What does a bank do at higher rate of spread?
A bank sells domestic at this rate
What does an importer do at a lower rate?
An importer sells domestic to a bank in exchange for foreign currency, and so receives lower rate when selling domestic to a bank
What does an exporter do at a lower rate?
Buys domestic from a bank in exchange for foreign currency and so pays the higher rate when buying domestic from a bank
What is the risk with revenue?
It will fall so that revenue is worth fewer domestic
