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BAFI 1018 International Finance – Final Revision – Semester A Year 2013 ___________________________________________________________________________ Page 1 of 5 Review Questions and Answers (updated on 07 May 2013)$13.99
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BAFI 1018 International Finance – Final Revision – Semester A Year 2013 ___________________________________________________________________________ Page 1 of 5 Review Questions and Answers (updated on 07 May 2013)
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Course
BAFI 1018 International Finance
Institution
BAFI 1018 International Finance
What is the relation between risk and exposure?
Since the source of foreign exchange risk is changes in the exchange rate,
exposure to foreign exchange risk is a measure of the sensitivity of the
domestic currency value of foreign currency items (assets, liabilities, and cash
flows) to chan...
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BAFI 1018 International Finance – Final Revision – Semester A Year 2013
___________________________________________________________________________
Review Questions and Answers (updated on 07 May 2013)
1. What is the relation between risk and exposure?
Since the source of foreign exchange risk is changes in the exchange rate,
exposure to foreign exchange risk is a measure of the sensitivity of the
domestic currency value of foreign currency items (assets, liabilities, and cash
flows) to changes in the exchange rate.
2. “Transaction exposure is a cash flow exposure”. Explain.
A cash flow exposure may be associated with trade flows (resulting from
exports and imports) and capital flows (e.g. dividends and interest payments).
It involves an actual conversion of foreign currency receivables and payables
into the domestic currency. This kind of exposure arises, for example, from (i)
a foreign currency asset or a liability that is already recorded on the balance
sheet, and (ii) a contract or an agreement involving a future foreign currency
cash flow.
3. What are the difference between economic exposure and transaction
exposure?
Economic exposure pertains to non-contractual or unplanned future cash
flows, while transaction exposure refers to a potential gain or loss arising from
transactions that are planned, currently in progress or have already been
completed. Economic exposures refer to changes in the future earning power
as a result of changes in exchange rates.
4. Discuss the factors that cause the demand and supply curves to shift,
consequently leading to changes in exchange rates.
Page 1 of 5
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