Question

Q No. 4: Evaluate the following statements and answer the questions: a. “A Country is always worse off when its currency is weak (falls in value)”. Is this statement true, false or uncertain? Explain your answer. 3

b) If the Pakistani government unexpectedly announces that it will be imposing higher tariffs on foreign goods one year from now, what will happen to the value of PKR today?

c. Understanding regarding Translation and transaction exposure is considered important for the management of Foreign Exchange Risk. Compare and contrast the two kinds of exposures i.e. Translation and transaction Risk.

Subject is Corporate finance answer require immegiately

Answer 1

4 .A . The given statement is FALSE because the country is not always worse off when its currency is weak because weak currency will be helping the exports and it will be leading to generation of the foreign income also in some cases and it will also lead to deduction of imports in the economy.

B.Yes, it will help the value of the Pakistani ruppee because when there would be a imposition of higher tariff on foreign goods, it will make the foreign goods costlier and there would be generation of increased demand of domestic goods and there would be increased production of domestic goods leading to an overall growth in economy and that will be leading to to strengthening of domestic currency that is Pakistani rupees.

C. Translation risk is related to translating the books of accounts of the foreign subsidiary into the parents books of accounts where as transaction risk is related to any risk which will be related to to transacting with the foreign companies and foreign parties so fluctuation in foreign exchange will be leading to transaction risk.

Impact of translation risk can only be felt for those companies who have foreign subsidiaries, whereas transaction risk can be borne by various companies who are doing exports and imports without any foreign subsidiary

Implication of translation risk is not huge whereas implication of transaction risk is huge.