Question

(14)      Exchange rate risk of a foreign currency payable is an example of
a.         transaction exposure.
b.         translation exposure.
c.         operating exposure.
d.         None of the above

(15)       A depreciating currency makes:

              a.         Import-competing goods less competitive

              b.         Export-competing goods more competitive

              c.         Export and import-competing goods more competitive

              d.         Export and export-competing goods more competitive

(16)      The price elasticity of demand for commodity products tends to be
a.         highly elastic.
b.         highly inelastic.
c.         both a) and b)
d.         none of the above

(17)      A domestic firm that sources and sells only domestically,
a.         faces exchange rate risk to the extent that it has international competitors in the domestic market.
b.         faces no exchange rate risk.
c.         should never hedge since this could actually increase its currency exposure.
d.         both b) and c)

Answer 1

14) This risk is called transaction exposure.

Transaction exposure is the risk that the value of the currency will change , before a transaction is settled.

So, the correct option is option a.

15 )A depreciating currency makes exports more competitive and the goods now look cheaper to the foreigners and imports look more expensive as due to the depreciating currency, the goods become more expensive. It also makes domestic goods look more attractive as opposed to foreign produced items.

Besides, due to higher prices of imported goods, people of a country tend to substitute domestically produced goods for the now more expensive imports.

So, the correct option is option C.

16)For commodity goods, the price elasticity is generally elastic, any changes in the prices will produce significant  change in the demand of commodity products as commodity products are interchangeable. However, there are certain products which are essential to consumers and the demand for such products is inelastic.

So, depending upon the nature of the commodity product can either be elastic or inelastic.

So, the correct option is C.

16)A domestic firm that sells, domestically faces  exchange rate risk to the extent that it has international competitors in the domestic market. A domestic firms sells domestically in faces currency risk in no other form other than the foreign goods competing against them.

The correct option is option A.