CMA Final · Strategic Performance Management and Business Valuation · Risk Management
A company expects Rs 10 crore of sales in USD next quarter and enters a forward contract to sell the dollars at a fixed rate. Which risk-management classification best describes this action?
It is hedging a transaction exposure. The forward contract fixes the rupee value of a known future dollar receipt, removing exchange-rate uncertainty on that specific transaction. Translation exposure concerns restating foreign subsidiaries' accounts, which is not involved here.
- AHedging a transaction exposureCorrect
- BDiversifying a business risk
- CAccepting an operational risk
- DHedging a translation exposure
Explanation
A forward sale locks in the rupee value of a specific future foreign currency receipt, which is hedging transaction exposure. Translation exposure relates to consolidating foreign subsidiary statements, so that option is wrong.
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