The objective of operating exposure management is to implement a plan to mitigat

Question

The objective of operating exposure management is to implement a plan to mitigate the negative effects and enhance the beneficial effects of unexpected changes in exchange rates a. True b. False Operating exposure management requires management to precisely predict shocks and disequilibrium. a. True b. False Operational Diversification may involve all of the following EXCEPT: Diverse sourcing of raw materials and components b. a. Diverse locations of production facilities c. Diverse markets for product sales d. Sourcing finance from one capital market If a firm's financing sources are diversified, it will be pre-positioned to take advantage of deviations from UIRP a. True b. False

Explanation / Answer

False: Operating exposure management is meant to hedge or cover exposures arising because of operational risk which is risk of loss resulting from inadequate or failed internal processes, people and systems or from external events like natural disasters. Unexpected changes in exchange risk is a kind of FX risk and comes under purview of Market Risk Exposures management.

False. No one can pricesly predict shocks and disequilibrium. The operational risk events like natural calamities, failed systems and processes are very difficult to predict. The management team should have full recovery plan in place in case such unwanted events happen. Apart from this there should be proper controls in place for preventing such events to happen in first place.

Operational Diversification will NOT involve Sourcing finance from one capital market. This activity firstly doesn't diversify your risk. Secondly risk arising because of this activity is finacial risk and it does not comes under purview of Operating Exposure Management.

True. UIRP stands for Uncovered Interest Rate Parity. It referes to the fact that difference in interest rates between two countries is equal to expected change in exchange rates. If firm's financing sources are diversified then there is a possibility to obtain risk free profit using arbitrage techniques.

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