BAFI3200 W8 Foreign Exchange Risk Exposure and Management

Economic Exposure is:

• Economic exposure is the risk of changes in a company's market value due to currency fluctuations.
• Economic exposure is the risk of changes in a company's product pricing.
• Economic exposure refers to the risk of operational failures.
• Economic exposure is the potential for loss due to interest rate changes.

Operating exposure is:

• The risk of changes in cash flows due to currency fluctuations.
• The impact of interest rate changes on cash flows.
• The benefit of stable cash flows due to currency stability.
• The effect of inflation on pricing strategies.

Translation exposure is:

• Translation exposure is the risk of changes in financial statements due to currency fluctuations.
• Translation exposure refers to the risk of changes in market demand for products.
• Translation exposure is the risk of losing physical assets due to theft.
• Translation exposure is the risk of operational losses from employee fraud.

What is correct about hedging forex receivables?

• Ignore currency risk as it has no impact.
• Use forward contracts or options to hedge against currency risk.
• Invest in stocks to mitigate currency fluctuations.
• Convert all receivables to cash immediately.

What is hedging forex receivables using money market hedging:

• Money market hedging is solely about trading stocks in the forex market.
• Money market hedging requires no financial instruments to manage exchange rates.
• Money market hedging involves only investing in foreign currency without borrowing.
• Money market hedging involves borrowing in the foreign currency and investing in the home currency to lock in exchange rates.

How to hedge forex receivables using option contracts?

• Hedge forex receivables by selling options to gain profit.
• Ignore currency risks and focus on domestic investments.
• Use futures contracts to hedge against currency fluctuations.
• Hedge forex receivables by purchasing options that protect against unfavorable currency movements.

What is the primary purpose of using forward contracts in forex?

• To speculate on future currency movements for profit.

• To lock in exchange rates for future transactions.

• To eliminate all risks associated with foreign investments.

• To convert currencies at the current market rate.

How does economic exposure differ from transaction exposure?

• Economic exposure is only relevant for multinational companies, while transaction exposure applies to all businesses.

• Economic exposure affects a company's market value, while transaction exposure affects cash flows from specific transactions.

• There is no difference; both terms refer to the same type of risk.

• Transaction exposure is broader and includes all types of currency risks, while economic exposure is limited to operational risks.

How can a company mitigate transaction exposure?

• By ignoring currency fluctuations.

• By using financial derivatives like forwards and options.

• By increasing prices in foreign markets.

• By diversifying its product line.

What is the impact of currency depreciation on a multinational company's revenue?

• It only affects costs, not revenue.

• It has no effect on revenue.

• It generally increases revenue from foreign sales.

• It decreases revenue from foreign sales.