Risk Management - Foreign Exchange Risk

Question 1

How do exchange rates effect businesses ?

Answer 1

All businesses are effected by exchange rates, imports can become more expensive

Question 2

What is a good tool to remember for exchange rates ?

Answer 2

When one goes up the other goes down and vice versa

Question 3

What is a spot market ?

Answer 3

When you exchange currency immediately

Question 4

What is a forward market ?

Answer 4

Agreeing to change currencies at a future date at a price agreed now

Question 5

Explain translation risk ?

Answer 5

\When multiple currencies are condensed into one

Question 6

Explain the risks with translation risk ?

Answer 6

• Strength of assets may fluctuate as rates change
• Debt fluctuations based of the strenghthen and weakening of the currency

Question 7

What is economic risk about ?

Answer 7

Economic risk focuses of how changes in exchange rates may effect a companies economic position in growth

Question 8

What are the economic risks ?

Answer 8

• Import and exports. if a currency gets stronger. then imports and exports become much more expensive in other countries
• Strength in a domestic currency can lead to imports being cheaper leading to competition

Question 9

Explain transaction risk ?

Answer 9

Credit in foreign currencies may become more expensive subject to fluctuations

Question 10

What is the purpose of risk management ?

Answer 10

The purpose of risk management is to have more certainty over cash flows to avoid surprises

Question 11

What is important to note when invoicing in foreign currencies ?

Answer 11

• Ensure invoices are 100% for your protection
• Sine 100% of the risk is on the customer you may have to negotiate with the customer
• Some commodities are always exchanged in a certain currency such as oil

Question 12

What is leading and lagging ?

Answer 12

You may accelerate (lead) or delay (lag) in order to reduce risks and procure more ideal exchange rates

Question 13

Explain matching ?

Answer 13

A company may be able to reduce it’s exposure by matching receipts and payments. So using the same currency for receiving and providing payments.

Question 14

What is netting ?

Answer 14

Companies within a subsidiary may use net payments rather than the whole amount that is owed.

Question 15

Explain how forward contracts work ?

Answer 15

Forward contracts work by agreeing on an exchange rate price today and it being fulfilled in the future

Question 16

Explain how hedging a foreign company receipt ?

Answer 16

So if a company abroad owed you money you would match that amount at the spot rate in their currency converting your own and invest it until the company that owes you is ready to pay. When ready you pay off the obligation debt with money paid to you and you keep the interest.