Question

Which risk must a corporation minimize to effectively manage short-term currency fluctuations? a. Alpha risk b. Transaction risk c. Beta risk d. Asymmetric risk

Answer 1

Alpha risk and Beta risk are related to Type I errors and Type II errors while performing statistical analysis on a data. Specifically Alpha risk (Type I error) is the risk of incorrectly deciding to reject the null hypothesis. On the other hand, Beta risk (Type II error) is the risk is the probability that a false null hypothesis will be accepted by a statistical test.

Asymmetric risk happens when one party has some private information unknown to everyone else. Due to this, gains or losses are uncertain because the product involved in the transaction has an unpredictable value.

Regarding short-term currency fluctuations, there are three types of risk involved.

1. Transaction risk: Risk faced by a company when purchasing goods and services from a foreign country so that the price of the product is denominated in the selling company's currency.
2. Translation risk: Risk faced by a parent company owning a subsidiary in another country in the process of translating back subsidiary's financial statements, denominated in that country's currency.
3. Economic risk: Risk faced due to continuous unavoidable exposure to currency fluctuations.Also called forecast risk.

Hence, in order to effectively manage short-term currency fluctuations, a corporation should minimize transaction risks.

Current Ans - b