Exam 13: Managing Foreign Exchange Risk

Existence of foreign exchange exposures creates uncertainty about future cash flows.

Hedging usually takes the form of closing an exposure directly.

Some companies attempt to insulate themselves from exchange rate movements by using a passive approach and to concentrate on their core business.

Which of the following is a passive risk- management technique?

When exposures are covered using fixed- rate instruments, the business confronts the problem of regret; if the exchange rate moves in favour of the business, it gets no advantage from this movement.

The exchange rate may also have an indirect effect on a business through its impact on competitors or suppliers. This form of exposure is known as:

A firm's choice between active and passive management of exposures will depend on its:

A call option gives the right to buy Australian dollars in exchange for US dollars at a specified exchange rate.

A business has a___________ when its value depends on the exchange rate.

Which of the following is an element of currency swap?

'Covering everything' ignores all exposures.

The value of overseas investments (such as bonds or shares) will fall as the AUD appreciates.

A ____________ occurs when cash flows within the current accounting period are affected by movements in the exchange rate.

___________has forced businesses to develop techniques for dealing with the impact of exchange rate changes on their value.

In practice, future revenues are not fully predictable, so that a 'rule of thumb' is needed in order to implement this approach; for example, the (say) exporter might borrow enough to hedge three years' revenue. He will also be subject to restrictions arising out of balance sheet ratios (e.g. the debt- equity ratio).

Explain a currency swap.

An asset (liability) can be hedged by matching it with a liability (asset) which changes in value by the___________ direction whenever the basic position changes in value.

Accounting conventions require that the changes in the market value of the offshore assets and liabilities, including changes caused by movements in the exchange rate, be brought to book.

When the use of financial instruments increases the uncertainty of cash flows, they are being used for:

Businesses cannot use financial instruments to modify the uncertainty of future cash flows.