#1
Which of the following best describes foreign exchange risk?
The risk of fluctuating exchange rates affecting the value of international transactions.
ExplanationFluctuating exchange rates affect international transaction values.
#2
What is a common method used by companies to mitigate foreign exchange risk?
Hedging through financial derivatives.
ExplanationCompanies use financial derivatives to hedge foreign exchange risk.
#3
Which financial instrument is commonly used for hedging foreign exchange risk?
Futures contracts
ExplanationFutures contracts are commonly used for hedging foreign exchange risk.
#4
What is translation exposure in the context of foreign exchange risk?
The risk of changes in the value of foreign currency-denominated assets and liabilities.
ExplanationTranslation exposure is the risk of value changes in foreign currency assets and liabilities.
#5
Which exchange rate system allows currencies to float freely based on supply and demand?
Flexible exchange rate system
ExplanationFlexible exchange rate system allows currencies to float freely.
#6
What is a carry trade in the context of foreign exchange?
A trade where investors borrow low-interest rate currencies to buy high-interest rate currencies.
ExplanationCarry trade involves borrowing low-interest rate currencies to invest in high-interest rate ones.
#7
What is sovereign risk in the context of foreign exchange?
The risk of government defaulting on its debt obligations.
ExplanationSovereign risk refers to government defaulting on debt obligations.
#8
Which factor can influence the degree of transaction exposure a company faces?
The length of time until the transaction is settled.
ExplanationTransaction exposure can be influenced by the settlement time of transactions.
#9
What is economic exposure in the context of foreign exchange risk?
The risk of changes in competitive position due to exchange rate movements.
ExplanationEconomic exposure involves changes in competitive position due to exchange rate movements.
#10
Which of the following is NOT a method of measuring foreign exchange risk exposure?
Regression analysis
ExplanationRegression analysis is not a method for measuring foreign exchange risk exposure.
#11
What is the difference between transaction exposure and economic exposure?
Transaction exposure relates to short-term fluctuations in exchange rates, while economic exposure relates to long-term changes.
ExplanationTransaction exposure concerns short-term exchange rate fluctuations; economic exposure involves long-term changes.
#12
Which type of hedging strategy involves matching currency cash flows to offset transaction exposure?
Money market hedge
ExplanationMoney market hedge involves matching currency cash flows to offset transaction exposure.