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Homework answers / question archive / a)Identify and explain the three main categories of risk that a company may be exposed to from movements in exchange rates, Illustrate your answer with an example for each category

a)Identify and explain the three main categories of risk that a company may be exposed to from movements in exchange rates, Illustrate your answer with an example for each category

Finance

a)Identify and explain the three main categories of risk that a company may be exposed to from movements in exchange rates, Illustrate your answer with an example for each category. (12 marks)
e) If the contract was cancelled fully explain the consequences if you had hedged by using the forward contract or the option contract. You should illustrate your answer with appropriate numerical examples. (12 marks)
f) Evaluate the use of forward contract and currency options to hedge transaction risk and advise the management of Glamour Plc on the best course of action in this case. (9 marks)
a) Explain how a SWAP operates and discuss the ways in which a multinational firm may benefit from its use. (9 marks)
arks) b) Describe three interest rate hedging techniques apart from SWAPs that the Financial Director may include in her report. 111 marvel

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There are 3 type of risk associated with movement of exchange rate risk and they are as follows-

A. Transaction risk is a type of risk with the company will be facing when it is buying a product from another company in another country and it is selling a product to another company in another country so it is related to a particular transaction.

For example, euros receivables due to a transaction of United State company in Europe.

B. Translation risk is the type of risk when the parent company will have different subsidiaries in other countries and they will have to convert the books of account of subsidiary into the parents book and it will be leading to risk and loss.

For example, when Walmart is accommodating the Flipkart books of accounts into the American domestic consolidated books of account.

C. Economic risk is the type of forecast risk when the company market value is continuously impacted by the unavoidable exposure to currency fluctuation.

Exposure to the value of company due to change in the exchange rate and exposure to the futuristic cash flows of the company will be an example of economic risk.

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