Foreign Exchange Risk Mitigation Techniques/Assessment

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Globe for WikiEducator.jpg Unit 2.1- Foreign Exchange Risk Mitigation Techniques 

Introduction | Rates of Exchange | Market Drivers | Measuring FX Exposure | Business Needs for Foreign Currency | Foreign Exchange Trading | Common Instruments to Offset Risk | Summary | Resources | Activities | Assessment


1. When purchasing or selling foreign currency at a spot rate, what best describes your adverse (negative) foreign exchange risk?

a. the loss related to a change in foreign exchange regulations in the country
b. the loss due to an unexpected change in the country’s quoted FX rate
c. the loss due to the country’s inability to service its foreign debt
d. the loss due to the translation of your foreign assets held in that country

2. The current market conditions indicate that in the next 90 days the US dollar is expected to decline in value. The company is currently going through a very tight cash flow period and must monitor cash closely. The company has an outstanding foreign currency payable that is due for payment in the next 60 days. The current spot rate is favorable to cover the payable due in 60 days. Which of the following would you recommend based on the current condition of the company?

a. spot contract
b. foreign currency bank loan
c. forward contract
d. purchase the needed currency at the spot rate and place on deposit at a foreign bank until the payable is due

3. Which of the following best defines the balance of payments?

a. the sum of the current account, the capital account and the change in official reserves
b. the sum of all exports and imports of goods services and financial capital
c. the sum of the countries’ inflation rate and all net payments between the two countries
d. the sum of Gross Domestic Product (GDP) and the current country deficit

4. Which of the following is defined as allowing open market conditions to determine the value of the currency in relationship to others?

a. fixed rate of exchange
b. closed border convertibility
c. managed rate of exchange
d. floating rate of exchange

5. Companies that have operations overseas use transfer pricing to revalue their balance sheet creating a “paper” gain or loss. Which best describes this type of exposure?

a. translation exposure
b. political exposure
c. economic exposure
d. transaction exposure

6. Which of the following best describes a forward contract?

a. the purchase of a foreign currency on a future date with immediate delivery on that future date
b. the purchase of a foreign currency today with immediate payment and delivery
c. the purchase of a foreign currency today for a fixed price for delivery at a specific future date
d.the purchase of a foreign currency today for a variable price for delivery at a specific future date

7. Is it important to monitor foreign exchange positions on a continual basis?

a. No, because market rates do not change except in your favor.
b. Yes, because foreign exchange rates are constantly changing.
c. No, because all foreign exposure is automatically hedged by the free markets.
d. Yes, because the dollar is always weakening.

(Correct answers: 1=b, 2=c, 3=a, 4=d, 5=a, 6=c, 7=b.)