6. Foreign exchange risk Aa Aa Companies that compete in the global economy face

Question

6. Foreign exchange risk Aa Aa Companies that compete in the global economy face various types of risks-for example, foreign exchange risk. Three distinct categories of foreign exchange risk are transaction risk, economic risk, and translation risk Consider the following case: Anusha works for a multinational conglomerate firm. The firm's business extends across different sectors, such as computers, consumer electronics, and automobiles. Her job is to monitor foreign exchange risk and recommend strategies for managing it. Situation The firm's U.S. location purchased computer chips from Japan and agreed to pay in yen at delivery after 90 days. The estimations of the purchase cost are based on the 90-day forward rate Anusha identifies the risk, classifies it, and recommends potential strategies. Based on your understanding of foreign exchange risk, complete the tasks involved in Anusha's analysis Identify the risk Type of risk Transaction exposure Translation exposure Economic exposure Strategies for managing the risk O Sell the amount of the purchase cost at the O Buy the amount of the purchase cost at the Long-term risk Short-term risk known 90-day forward rate known 90-day forward rate Invest in interest-bearing U.S. securities

Explanation / Answer

1. Transaction exposure as this exposure is related to changes in foreign currency rate on the transaction undertaken by the company.

2. Short term risk as it is for 90 days.

3. Buy the amount of purchase cost at the known 90 day forward rate for paying off liability.

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