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CFA Level I · CFA Level I Exam · Introduction to Risk Management

A corporation issues debt in a foreign currency and earns revenue in its home currency. A sharp depreciation of the home currency raises its debt-service burden. This exposure is most likely an example of:

This is market risk arising from exchange rate movements. Home-currency depreciation makes foreign-currency debt service costlier relative to home-currency revenue. It is not settlement risk, which concerns failed delivery or payment at settlement, and the problem is the currency move rather than interest rate changes.

  1. ASettlement risk
  2. BInterest rate risk only on the coupon
  3. CMarket risk from exchange ratesCorrect

Explanation

Market risk includes losses from adverse movements in exchange rates, interest rates, equity prices and commodity prices. Here the home-currency depreciation raises the cost of servicing foreign-currency debt, so it is currency risk, a form of market risk. Settlement risk concerns delivery failure at settlement.

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