Question

Which of the following situations does NOT involve transaction exposure for a U.S. firm?

		Buying automobiles from England for GBP 20,000,000 payable in one month.
		Investing in euro-denominated bonds maturing in 3 months
		Selling computers to a Swiss customer for USD 22,000,000 on 30-day credit
		Selling tractors to a Chinese customer for CNY 913,000,000 on 90-day credit
		Investing in yen-denominated stocks in Japan for 4 months

Answer 1

Transaction exposure is basically the level of uncertainty involved in international trade. Majorly it is the risk that currency exchange rates will fluctuate and will have a negative impact on firms profits.

So in short if firm has to deal with FX changes it will involve transaction exposure.

1. While buying automobiles from England for GBP 20,000,000 which is payable in one month the firm is exposing itself to the US Dollar / GBP FX risk. As the firm has to pay in GBP and if the rate fluctuates it will change the amount of dollars company has to spend as compare to amount of dollars initially when sale happened.

2. Investing in euro-denominated bonds maturing in 3 months means firm will get the euros in 3 months and hence if the Euro/Dollar rate fluctuates firm can end up receiving less dollars.

3. Selling computers to a Swiss customer for USD 22,000,000 on 30-day credit means the firm will get the payment in USD in 30 days and hence the swiss customer is at the FX risk rather than the US firm as swiss firm have to convert their swiss currency to US dollars to pay US firm.

4. Selling tractors to a Chinese customer for CNY 913,000,000 on 90-day credit means the US firm will get the payment in CNY and hence converting those CNY to Dollars is the US firms responsibility which exposes them to CNY/Dollar FX risk.

5. Investing in yen-denominated stocks in Japan for 4 months means US foirm will get the money in Yen in 4 months which exposes them to YenDollar FX risk as they have to convert the Yen proceeds to US dollars.

Hence option (3) is correct