Question

a. Transaction exposure is defined as

A. the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.

B. the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.

C. the potential that the firm's consolidated financial statement can be affected by changes in exchange rates.

D. ex post and ex ante currency exposures.

b. An exporter faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of

A. paying or collecting early.

B. paying or collecting late.

C. paying late, collecting early.

D. paying early, collecting late.

c. Purchasing Power Parity (PPP) theory states that

A. the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels.

B. as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will depreciate against stable currencies.

C. the prices of standard commodity baskets in two countries are not related.

D. both a) and b)

Answer 1

a) Transaction exposure is defined as

A. the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.

Transaction exposure is a type of risk faced due to exchange rate fluctuations by companies involved in trade with other countries.

b)An exporter faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of

C. paying late, collecting early.

If an exporter faced with exposure to a depreciating currency pays late and collects early , then in both the cases he will earna profit . In an appreciating currency he should pay early and collect late.

c) Purchasing Power Parity (PPP) theory states that

D. both a) and b)

PPP theory states both of the above.

The exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels and as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will depreciate against stable currencies