Operating risk exposure can be described as exposure to exchange rate, interest

Question

Operating risk exposure can be described as exposure to exchange rate, interest rate, and inflation risks farther in the future than the risk from contracted or anticipated transaction exposure a. True b. False Management of operating exposure involves moment-by-moment trading responses to exchange rate changes. a. True b. False Only unexpected changes relative to Relative Purchasing Power Parity (RPPP) or Uncovered Interest Rate Parity (UIRP) are relevant for operating risk exposure. a. True b. False 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

Explanation / Answer

a.

Exchange rate, inflation rate and interest rate in future is unpredictable, so operating risk exposure associated with these factors are higher. At same time if these risk is managed through contract (Futures, forward) or anticipated transaction exposure then risk become lower.

Statement is true.

b.

Management of operating exposure involves, futures contract, forward contract, SWAP agreement in response to uncertainty in future exchange rate.

Statement is false.

c.

Only Unexpected change relative to relative purchasing power parity or uncovered interest rate parity are relevant for operating risk exposure.

Statement is true

d.

The objective of operating exposure management is to implement a plan to mitigate the negative effect and enhance the beneficial effect of unexpected chnages in exchange rate.

Statement is true.

e.

Operating exposure managment require management to precisely predict the equilibrium and change in expected future exchange rate.

Statement is false.

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